UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended September 30,
200
9
________________________________________
or
¨
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period
from
_______________
to
__________________________________________________________
Commission
File number 1-8086
_________________________________________________________________________
GENERAL DATACOMM INDUSTRIES,
INC.
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(Exact
name of registrant as specified in its
charter)
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Delaware
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06-0853856
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification
Number)
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6 Rubber Avenue, Naugatuck, Connecticut
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06770
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (203)-729-0271
Securities
registered under Section 12(b) of the Exchange Act: None
Securities
registered under Section 12(g) of the Exchange Act:
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Common Stock, $.01 par
value
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(Title of class)
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
¨
Yes
x
No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
¨
Yes
x
No
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES
x
NO
¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer
¨
|
Accelerated
filer
¨
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Non-accelerated
filer
¨
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Smaller
reporting company
x
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Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Act)
.
¨
Yes
x
No
State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, as of the last business day of the registrant’s most recently
completed second fiscal quarter (March 31, 2009):$536,691.
Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of December 15, 2009:
3,487,473
Shares of Common Stock
634,615
Shares of Class B
Stock
DOCUMENTS
INCORPORATED BY REFERENCE: None
GENERAL
DATACOMM INDUSTRIES, INC.
INDEX
TO ANNUAL REPORT ON FORM 10-K
FOR
THE FISCAL YEAR ENDED SEPTEMBER 30, 2009
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Page
#s
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PART
I
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Item
1.
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Business
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3
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Item
1A.
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Risk
Factors
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8
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Item
1B.
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Unresolved
Staff Comments
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15
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Item
2.
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Properties
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15
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Item
3.
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Legal
Proceedings
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15
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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15
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PART
II
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Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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15
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Item
6.
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Selected
Financial Data
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16
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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16
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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25
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Item
8.
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Financial
Statements and Supplementary Data
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26
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Item
9.
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Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
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45
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Item
9A(T).
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Controls
and Procedures
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45
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Item
9B.
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Other
Information
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46
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PART
III
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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47
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Item
11.
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Executive
Compensation
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48
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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51
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Item
13.
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Certain
Relationships and Related Transactions, and
Director
Independence
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53
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Item
14.
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Principal
Accounting Fees and Services
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54
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PART
IV
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Item
15.
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Exhibits,
Financial Statement Schedules
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55
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SIGNATURES
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57
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Supplemental
Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the
Act by Registrants Which Have Not Registered Securities Pursuant to Section 12
of the Act: No annual report or proxy material has been sent to security
holders.
Subsidiaries
of the Registrant
Certification
of Chief Executive Officer
Certification
of Chief Financial Officer
Certification
of CEO and CFO
PART I
ITEM 1. BUSINESS
General
DataComm Industries, Inc. was incorporated in 1969 under the laws of the State
of Delaware. Unless the context otherwise requires, the terms “General
DataComm”, “Company” and “GDC” as used here and in the following pages mean
General DataComm Industries, Inc. and its subsidiaries. In addition,
in the following business discussion “TDM” refers to Time Division Multiplexing
technology, “ATM” refers to Asynchronous Transfer Mode cell switching
technology, “LAN” refers to Local Area Network, “WAN” refers to Wide Area
Network, “IP” refers to Internet Protocol technology, “MPLS” refers to
Multi-Protocol Label Switching, “Ethernet” refers to a LAN
transmission standard and “SNMP” refers to Simple Network Management
Protocol.
Reference
is made to Note 1 to the Notes to Consolidated Financial Statements presented in
Item 8 of this Form 10-K, and to “Risk Factors” presented below.
Overview
General
DataComm Industries, Inc., based in Naugatuck, Connecticut, is a provider of
networking and telecommunications products, services and solutions. The Company
is focused on providing multi-service provisioning solutions using multi-service
access and switching products. The Company designs, develops, assembles,
markets, sells, installs and maintains products that enable telecommunications
common carriers, corporations, and governments to build, improve and more cost
effectively manage their global telecommunications networks.
The
Company’s products and services are marketed worldwide through a combination of
direct sales and distribution channels. The Company sells its products, services
and solutions through its own sales organizations to common carriers (telephone
companies), as well as corporations, governments, system integrators,
distributors, and value-added and other resellers. International sales
represented approximately 37% of the total Company revenues in fiscal 2009 as
compared to 30% in fiscal 2008.
The
Company’s user base includes: local exchange carriers, including AT&T, Bell
Canada, Qwest and Verizon; inter-exchange carriers; corporate end users; and
government entities including NATO, NASA, U.S. Department of Defense
and other U.S. Government Departments, including the U.S. State Department, the
FAA, the U.K. Ministry of Defense and the Italian Ministry of Defense.
Distributors and integrators deliver General DataComm products to markets in
Europe and Latin America.
The Company’s executive offices are
located at 6 Rubber Avenue, Naugatuck, Connecticut 06770, and its telephone
number is (203) 729-0271.
The
Company leverages the sales resources of distributors, value-added and other
resellers, integrators and telecommunication provider channels, in an effort to
achieve greater sales coverage both domestically and internationally. The
network access products produced by the Company for the most part have an
inherently short selling cycle. However, the Company estimates that it takes
approximately six to eighteen months to get these products approved for use in
the central offices of telephone companies
. S
ystem products,
such as multi-service switches and multiplexers, have a longer sales cycle and
require a greater level of system engineering and ongoing customer
support.
GDC
continues to shift its priorities in the overall access and multiservice
switching markets. These priorities are governed by the accelerated growth of
Internet-based services, packet-based (IP) voice and data services, and
Ethernet, all of which require increased attention to network management,
performance, quality and network security. GDC has developed a MPLS, Ethernet
and IP platform that evolves its multiservice switch family into packet based
services, including Metro Ethernet Forum compliant services as well as TDM, IP,
ATM, and Frame Relay services.
Principal
Products and Services
GDC is focused on products it believes
to be targeted at market growth areas. Specifically, GDC’s switching, routing
and Ethernet extension solutions, networking products including integrated
access systems for digital and analog transport, multiplexers and multi-service
switches for network consolidation, satellite bandwidth management and legacy to
MPLS/IP migration, constitute the major product elements serving to meet
emerging market requirements. The Company does this by delivering products to
target specific applications to provide solutions that are intended to be
superior in price and performance to the competition.
These
product solutions are offered across three distinct focused market segments:
Carrier, Enterprise and Government.
Multiservice Switches:
The
Multiservice switching family known as “Xedge”, manages multiple applications
over various transport technologies and are installed in large enterprise and
government networks for mission critical applications.
GDC
specializes in converging and migrating legacy TDM, ATM, Frame Relay and other
services to packet based (Ethernet, IP, MPLS) architectures.
SpectraComm:
The
SpectraComm product line consists of products that are NEBS Level 3 Certified
for deployment in mission critical applications in telephone company central
offices and government applications. See “The Significance of NEBS
Certification” below.
Multiplexers:
GDC’s
multiplexer products have been long known for their reliability and flexibility.
They are deployed in large enterprise and government networks
worldwide.
Professional Services:
GDC
provides a full range of Network Services including maintenance contracts,
network monitoring and on site maintenance to assist customers in maintaining
and managing their networks.
Multiservice
Switches - Xedge6000
GDC’s
flagship
Xedge6000
multiservice platform now supports packet based MPLS and Ethernet transmission
as well as ATM based multiservices. GDC has introduced its Packet
Cell Switch (PCx) that enables multiservices (native Frame Relay, TDM, Ethernet,
ATM, and IP) over MPLS, ATM, or Ethernet trunk interfaces. The
technology allows service providers and private network operators to offer
converged solutions while reducing capital and operational
expenditures. The PCx plugs into any of GDC’s flagship Xedge6000
family of multiservice switches including the new Xedge6002 two slot
shelf. GDC has also introduced the Packet Circuit Emulation (PCE)
Module for circuit emulation services over MPLS/IP. The new adaptive serial I/O
Module (ASIO) combines with the PCE to provide unique time independent
networking. GDC’s network manager, ProSphere, facilitates the provisioning and
monitoring of the converged service network.
GDC
Xedge6000
switches and
related Xedge products deliver cost-effective solutions for public network
providers and large private network operators in government, transportation,
utilities, energy, and education sectors. GDC also resells other products
(video codecs, integrated access devices, routers, among others) that extend the
solution application reach of the
Xedge6000.
The ProSphere
network management system provides a useful means of managing not only the Xedge
family of switches, but also applications such as
video-conferencing.
Multiplexers
General
DataComm supplies a line of multiplexing products. The TMS-3000 is a network
managed bandwidth management system for high-speed wide area
networks. The TMS-3000 is primarily sold to system integrators,
government agencies and enterprise customers to build or expand fault tolerant
resilient backbone networks. GDC also provides an access product into the
TMS-3000 network for smaller branch or regional offices via the OCM feeder and
Minimux platforms. The OCM platform offers connectivity to a variety of digital
carrier services and uses the same bandwidth optimization techniques as the
TMS-3000 to efficiently transport a changing mix of applications, LAN to WAN
integration, image and video along with traditional voice and data traffic.
Minimux platforms provide a data and voice solution for satellite applications
where minimum latency and maximum efficiency are mandatory.
OEM
The
Company has entered into agreements with other manufacturers to supply products
for sale which complement its own products’ capabilities and provide a broader
solution. Such manufacturers include H3C and Tailyn
Networks.
General
DataComm’s SpectraComm family of NEBS Level 3 modems, digital service units and
LAN products support a wide range of applications. These include T3 broadband
applications including M13, T1/FT1, E1/FE1 wide-band applications, 2.4 kbps - 64
kbps DDS (Digital Data Service) narrow-band applications, switched or private
line analog applications and Local Area Network applications (Ethernet Extension
and Ethernet switching). The flexible, expandable design of the SpectraComm
system accommodates network growth, spanning from a single card enclosure to a
robust 16-slot shelf system. This modularity maximizes the use of network
facilities and helps to reduce network management complexity. The SpectraComm
Manager provides SNMP Management for an entire shelf and is compliant with the
Industry Standard HP OpenView®. GDC’s SpectraComm devices provide
packaging flexibility, meaning that any of the SpectraComm devices (from 202 to
V34 to T1 to T3 to IP) will fit, and are interchangeable between the various
enclosures’ platforms. This interchangeability allows flexible inventories,
lower sparing and easier deployment, and are designed for low power usage, all
of which result in overall lower costs.
The
Significance of NEBS Certification
NEBS is a
requirement for Central Office equipment located in North American Public
Switched Network centers. The rigorous NEBS requirements are a
universal measure of network product excellence for carriers. NEBS includes
criteria for operational continuity, protection of property, and personnel
safety and NEBS is the major test of quality and safety that is required for
organizations supplying or purchasing network equipment for public network high
density applications.
Specifically,
the NEBS criteria are intended to:
·
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Ensure
equipment compatibility with telephone industry
standards
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·
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Simplify
equipment planning and installation
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·
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Guard
against service outages
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·
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Prevent
interference to close proximity telecommunications
equipment
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·
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Minimize
the risk of fire spread
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·
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Ensure equipment operation under
stressful environmental
conditions
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·
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Protect personnel from injury -
surge, shock and toxicity
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Telcordia
has grouped NEBS criteria into three functional groups or levels, with Level 3
being the most stringent. Anything less than Level 3 certification can restrict
deployment in certain carrier environment applications. By meeting NEBS Level 3
requirements, GDC products can be deployed in all interior carrier environments.
The NEBS Level 3 certification of GDC’s SpectraComm products is a key
requirement for our Carrier and Service Provider customers. SpectraComm
CSU/DSUs, Modems, LAN Extension and Ethernet switching devices function in their
mission critical internal network infrastructures and central office
applications, providing secure, remote network management, SS7 Signal Transport,
Cell Site to CO access, and CPE provisioning.
Professional
Services
Since GDC
aims to sell application solutions to its customers, it offers a range of
professional services to help customers apply technology efficiently through
design and consulting, diagnose and remedy problems efficiently with third level
technical expert support, as well as offer training, installation and project
management services as required.
General
DataComm has field-proven experience in the successful design, deployment,
monitoring and maintenance and support of voice and data networking
equipment. Flexible and responsive to customer specific needs, General DataComm
provides complete outsourced services, installation, maintenance and product
repair services for the complete line of network access products along with
services such as project management, training, coordination, staging and network
testing. GDC offers a range of guaranteed maintenance response plans:
two- four- or eight-hour and next day on-site service. Unlike most
industry-offered training programs, which deliver off-the-shelf, packaged
courses, GDC creates a custom training solution to fit a customer’s specific
needs in terms of course content and duration. GDC’s factory direct repair
facility provides product and warranty repair at its repair center in Naugatuck,
Connecticut.
Sales
and Marketing
Effectively
employing networking technology has become a key factor in developing a
successful business. Communications networks have emerged as valuable assets
that generate revenue and provide competitive advantage. General DataComm over
the past 40 years has helped many of the world’s largest enterprises harness the
power of networking. Electronic channels of commerce have been established, and
reliable public and private communication links are essential to any
organization’s survival. GDC’s full range of products and services can support
this growing network challenge. The Company’s products are sold
worldwide via a dedicated domestic sales force and through a domestic and
international distributor network, augmented by original equipment manufacturers
(OEM’s), value-added and other resellers, system integrators and alternate
service providers.
GDC’s
customer base includes: local exchange carriers, including, AT&T, Qwest,
Verizon and Bell Canada; inter-exchange carriers; corporate end users; and
government entities including federal, state, local and foreign governments. The
Company’s top five customers accounted for 57% of revenue in fiscal
2009.
Research
and Development
The
Company focuses its development efforts on providing enhanced functionality to
its existing products, and the development of additional software-based features
and functionality. Extensive product development input is obtained
directly from customers and from monitoring of end-user needs as well as changes
in the marketplace. The Company’s current product development focus has been on
developing IP and Ethernet solutions and completing new products and
enhancements to Xedge products. Company management believes that our success
will depend, in part, on our ability to develop and introduce in a timely
fashion new products and enhancements to our existing product lines. GDC has in
the past made, and intends to continue making, significant investments in
product and technological development. Research and product development
activities are performed at the Company’s facility in Naugatuck,
Connecticut.
The
Company’s inability to develop new products or enhancements to existing products
on a timely basis, or the failure of these new products or enhancements to
achieve market acceptance, could have a material adverse effect on the Company’s
business.
GDC’s
expenditures for research and development activities amounted to $1,661,000 and
$3,232,000 for fiscal 2009 and 2008, respectively.
Manufacturing
GDC’s
manufacturing operations consist of materials planning and procurement, final
assembly, product assurance testing, quality control, and packaging and
shipping. GDC currently uses several independent manufacturers to supply certain
printed circuit boards, chassis and subassemblies. The Company believes that the
efficiency of its manufacturing process to date is largely due to product
architecture and commitment to manufacturing process design. GDC has
spent significant engineering resources producing customized products to assure
consistent high quality. Products are tested after the assembly process using
internally developed product assurance testing procedures.
The
Company’s products use certain components, such as microprocessors, memory chips
and pre-formed enclosures that are acquired or available from one or a limited
number of sources. The Company has generally been able to procure adequate
supplies of these components in a timely manner from existing
sources. While most components are standard items, certain
application-specific integrated circuit chips used in many of the Company’s
products are customized to the Company’s
specifications.
None
of
the suppliers of components operate under contract. Additionally,
availability
of some standard components may be affected by market shortages and allocations.
The Company’s inability to obtain a sufficient quantity of components when
required or to develop alternative sources at acceptable prices and within a
reasonable time, could result in delays or reductions in product shipments which
could materially affect the Company’s operating results in any given period. In
addition, the Company relies heavily on outsourcing subcontractors for
production. The inability of such subcontractors to deliver products
in a timely fashion or in accordance with the Company’s quality standards could
materially affect the Company’s operating results and business.
Backlog
The
Company’s order backlog, while one of several useful financial statistics, is
however, a limited indicator of the Company’s future revenues. Because of
normally short delivery requirements, the Company’s sales in each quarter
primarily depend upon orders received and shipped in that same
quarter.
In
addition, since product shipments are historically heavier in the last month of
each quarter, quarterly revenues can be adversely or beneficially impacted by
several events including: unforeseen delays in product shipments; large sales
that close at the end of the quarter; sales order changes or cancellations;
changes in product mix; new product announcements by the Company or its
competitors; and the capital spending trends of customers.
Competition
The
telecommunications and networking industry is intensely competitive. Each
competitor offers its own solutions and all are formidable. Many of the
Company’s current and prospective competitors including ADC Telecom, Cisco,
Adtran, Network Equipment Technologies and Alcatel/Lucent, have greater name
recognition, a larger installed base of networking products, more extensive
engineering, manufacturing, marketing, distribution and support capabilities and
greater financial, technological and personnel resources. There can
be no assurance that the Company will be able to maintain or grow its market
share of multi-service switches, network access and other products.
Patents
and Related Rights
The
Company presently owns one domestic patent, has a non-exclusive, royalty-free
license to 35 domestic patents and has no additional applications pending. The
Company believes that certain features relating to its equipment for which it
has obtained patent rights are important to its business, but does not believe
that its success is dependent upon its ability to obtain and defend such
patents. Because of the extensive patent coverage in the communications industry
and the rapid issuance of new patents, certain equipment of the Company may
involve infringement of existing patents not known to the
Company. See the “Risk Factors” section below and the caption titled
“Limited Protection of Intellectual Property” included therein.
Employees
At
November 30, 2009, the Company employed 61 persons, of whom 12 were research and
development positions, 15 were manufacturing positions, 14 were sales and
marketing positions, 8 were service and technical support positions, and 12 were
general management and support positions, including information technology,
accounting, human resources, facilities maintenance and other miscellaneous
functions. No Company employees are covered by collective bargaining agreements.
The Company has never experienced a work stoppage. Many employees are highly
skilled, and the Company’s success depends in part upon its ability to attract
and retain such employees. Due to the Company’s limited financial resources, the
Company’s employee benefit programs are likely not to be equivalent to those
offered by our competitors. While to date management does not believe this to
have resulted in significant difficulties in hiring and retaining skilled
personnel, this may not be the case in the future.
ITEM
1A.
RISK FACTORS
THIS
ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED. FOR THIS PURPOSE, STATEMENTS CONTAINED HEREIN THAT ARE NOT
STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS.
WITHOUT LIMITING THE FOREGOING, THE WORDS “BELIEVES”, “ANTICIPATES”, “PLANS”,
“EXPECTS” AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES AND ARE NOT GUARANTEES OF FUTURE PERFORMANCE. ACTUAL RESULTS MAY
DIFFER MATERIALLY FROM THOSE INDICATED IN SUCH FORWARD-LOOKING STATEMENTS AS A
RESULT OF CERTAIN FACTORS INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH UNDER
THIS HEADING.
The Financial Statements are
Unaudited and the Quarterly Financial Statements Have Not Been Reviewed.
The financial statements in the Form 10-K for the years ended September 30, 2009
and 2008 as filed with the Securities and Exchange Commission have not been
audited by an independent accounting firm. The financial statements in Form 10-Q
for the quarters ended December 31, 2008, March 31, 2009 and June 30, 2009 as
filed with the Securities and Exchange Commission have not been reviewed by an
independent accounting firm. While the Company’s internal control over financial
reporting is a process designed to provide reasonable assurance regarding fair
presentation of financial statements in accordance with generally accepted
accounting principles, because of its inherent limitations such internal control
may not prevent or detect misstatements that may arise in an audit or review by
an independent accounting firm.
GDC’s Negative Operating History
Since Emerging from Bankruptcy.
The Company emerged from Bankruptcy on
September 15, 2003. Accordingly, an investor in the Company’s common stock must
evaluate the risks, uncertainties, and difficulties frequently encountered by a
company emerging from Chapter 11 and that operates in rapidly evolving markets
such as the telecommunications equipment industry.
Due to
the Company’s limited and negative operating history, and poor performance since
emergence, the Company may not successfully implement any of its strategies or
successfully address these risks and uncertainties. As described by the
following factors, past financial performance should not be considered to be a
reliable indicator of future performance, and investors should not use
historical trends to anticipate results or trends in future
periods.
Non-payment of Debentures and
Certain Senior Debt.
The Company has outstanding
debentures in the
principal amount of approximately $19.4 million which, together with accrued
interest thereon matured on October 1, 2008. A subordinated security
agreement signed by the indenture trustee on behalf of the debenture holders
provides that no payments may be made to debenture holders and that no event of
default may be declared under the indenture while the senior secured
debt, including debt owed to Mr. Modlin and Mr. Segall (Chairman and Chief
Executive Officer, and Director, respectively), is outstanding. In
the absence of such restrictions the Company does not presently have the ability
to repay the debentures. A failure to pay the debentures when they
become due and payable as described above, could result in an event of default
being declared under the indenture governing the debentures. The
senior debt owed to Messrs. Modlin and Segall is due and payable but payment has
not been demanded by either of them. Together with the other conditions
described in the Liquidity section which follows, such condition raises
substantial doubt about the Company’s ability to continue as a going
concern.
Dependence on Legacy and Recently
Introduced Products and New Product Development.
The Company’s future
results of operations are dependent on market acceptance of existing and future
applications for the Company’s current products and new products in development.
Sales of the Company’s legacy products, primarily digital service
unit and V.34 lines, declined to approximately 22% of product sales in fiscal
2009 from 26% in fiscal 2008. The Company anticipates that net sales
from legacy products will continue to decline over the next several years and
net sales of new products will increase at the same time, with significant
quarterly fluctuations possible, and without assurance that sales of new
products will increase at the same time.
Market
acceptance of the Company’s recently introduced and future product lines is
dependent on a number of factors, not all of which are in the Company’s control,
including the continued growth in the use of bandwidth intensive applications,
continued deployment of new telecommunication services, market acceptance of
multiservice access devices, the availability and price of competing products
and technologies, and the success of the Company’s sales and marketing efforts.
Failure of the Company’s products to achieve market acceptance would have a
material adverse effect on the Company’s business, financial condition and
results of operations. Failure to introduce new products in a timely manner in
order to replace sales of legacy products could result in customers purchasing
products from competitors and have a material adverse effect on the Company’s
business, financial condition and results of operations.
New
products under development may require additional development work, enhancement
and testing or further refinement before the Company can make them commercially
available. The Company has in the past experienced delays in the introduction of
new products, product applications and enhancements due to a variety of internal
factors, such as reallocation of priorities, financial constraints, difficulty
in hiring sufficient qualified personnel, and unforeseen technical obstacles, as
well as changes in customer requirements. Such delays have deferred the receipt
of revenue from the products involved. If the Company’s products have
performance, reliability or quality shortcomings, then the Company may
experience reduced orders, higher manufacturing costs, delays in collecting
accounts receivable, and additional warranty and service expenses.
Customer Concentration and Economic
Conditions.
The Company’s customers include local exchange
carriers, inter-exchange carriers, wireless service providers, and resellers who
sell to these customers. Such service providers require substantial capital for
the development, construction, and expansion of their networks and the
introduction of their services. The ability of service providers to fund
such expenditures often depends on their ability to budget or obtain sufficient
capital resources. In the past, resources made available for such capital
acquisitions have varied along with market conditions in the United
States. If the Company’s current or potential service provider customers
cannot successfully raise the necessary funds, or if they experience any other
adverse effects with respect to their operating results or profitability, their
capital spending programs may be adversely impacted which could materially
adversely affect the Company’s business, financial condition and results of
operations.
A small
number of customers have historically accounted for a majority of the Company’s
sales (see Item 1. Business – Sales and Marketing). Sales to the Company’s top
five customers accounted for 57% and 54% of revenues in fiscal 2009 and
2008. There can be no assurance that the Company’s current customers
will continue to place orders with the Company, that orders by existing
customers will continue at the levels of previous periods, or that the Company
will be able to obtain orders from new customers. The Company expects the
economic climate and conditions in the telecommunication equipment industry to
remain unpredictable in fiscal 2010 and beyond. Additionally, world economic
conditions could have a material adverse effect on the Company’s operations. The
loss of one or more of our service provider customers, such as occurred in the
past through industry consolidation or otherwise, could have a material adverse
effect on our sales and operating results. A bankruptcy filing by one
or more of the Company’s major customers could materially adversely affect the
Company’s business, financial condition and results of operations.
Dependence on Key Personnel.
The Company’s future success will depend to a large extent on the
continued contributions of its executive officers and key management, sales, and
technical personnel. Each of the Company’s executive officers, and key
management, sales and technical personnel would be difficult to replace. The
Company does not have employment contracts with its key employees. The
Company
implemented significant cost and staff reductions in recent years, which may
make it more difficult to attract and retain key personnel. The loss of the
services of one or more of the Company’s executive officers or key personnel, or
the inability to attract qualified personnel, could delay product development
cycles or otherwise could have a material adverse effect on the Company’s
business, financial condition and results of operations.
Dependence on Key Suppliers and
Component Availability.
The Company generally relies upon several
contract manufacturers to assemble finished and semi-finished goods. The
Company’s products use certain components, such as microprocessors, memory chips
and pre-formed enclosures that are acquired or available from one or a limited
number of sources. Component parts that are incorporated into board
assemblies are sourced directly by the Company from suppliers. The
Company has generally been able to procure adequate supplies of these components
in a timely manner from existing sources.
While
most components are standard items, certain application-specific integrated
circuit chips used in many of the Company’s products are customized to the
Company’s specifications. None of the suppliers of components operate under
contract. Additionally, availability of some standard components may
be affected by market shortages and allocations. The Company’s
inability to obtain a sufficient quantity of components when required, or to
develop alternative sources due to lack of availability or degradation of
quality, at acceptable prices and within a reasonable time, could result in
delays or reductions in product shipments which could materially affect the
Company’s operating results in any given period. In addition, as
referenced above, the Company relies heavily on outsourcing subcontractors for
production. The inability of such subcontractors to deliver products
in a timely fashion or in accordance with the Company’s quality standards could
materially adversely affect the Company’s operating results and
business.
The
Company uses internal forecasts to manage its finished goods and components
requirements. Lead times for materials and components may vary significantly,
and depend on factors such as specific supplier performance, contract terms, and
general market demand for components. If orders vary from forecasts, the Company
may experience excess or inadequate inventory of certain materials and
components, and suppliers may demand longer lead times and higher prices. From
time to time, the Company has experienced shortages and allocations of certain
components, resulting in delays in fulfillment of customer orders. Such
shortages and allocations may occur in the future, and could have a material
adverse effect on the Company’s business, financial condition and results of
operations.
Fluctuations in Quarterly and Annual
Operating Results.
The Company’s sales are subject to quarterly and
annual fluctuations due to a number of factors resulting in more variability and
less predictability in the Company’s quarter-to-quarter sales and operating
results. As a small number of customers have historically accounted for a
majority of the Company’s sales, order volatility by any of these major
customers has had and may have an impact on the Company in the prior, current
and future fiscal years.
Most of
the Company’s sales require short delivery times. The Company’s ability to
affect and judge the timing of individual customer orders is limited. Large
fluctuations in sales from quarter-to-quarter could be due to a wide variety of
factors, such as delay, cancellation or acceleration of customer projects, and
other factors discussed below. The Company’s sales for a given quarter may
depend to a significant degree upon planned product shipments to a single
customer, often related to specific equipment or service deployment projects.
The Company has experienced both acceleration and slowdown in orders related to
such projects, causing changes in the sales level of a given quarter relative to
both the preceding and subsequent quarters.
Delays or
lost sales can be caused by other factors beyond the Company’s control,
including late deliveries by the third party subcontractors the Company is using
to outsource its manufacturing operations and by vendors of components used in a
customer’s products, slower than anticipated growth in demand for the Company’s
products for specific projects or delays in implementation of projects by
customers and delays in obtaining regulatory approvals for new services and
products. Delays and lost sales have occurred in the past and may occur in the
future. The Company believes that sales in the past have been adversely impacted
by merger and restructuring activities by some of its top customers. These and
similar delays or lost sales could materially adversely affect the Company’s
business, financial condition and results of operations. See “Customer
Concentration” and “Dependence on Key Suppliers and Component
Availability”.
The
Company’s backlog at the beginning of each quarter typically is not sufficient
to achieve expected sales for that quarter. To achieve its sales objectives, the
Company is dependent upon obtaining orders in a quarter for shipment in that
quarter. Furthermore, the Company’s agreements with certain of its customers
typically provide that they may change delivery schedules and cancel orders
within specified timeframes, typically up to 30 days prior to the scheduled
shipment date, without significant penalty. Some of the Company’s customers have
in the past built, and may in the future build, significant inventory in order
to facilitate more rapid deployment of anticipated major projects or for other
reasons. Decisions by such customers to reduce their inventory levels could lead
to reductions in purchases from the Company in certain periods. These
reductions, in turn, could cause fluctuations in the Company’s operating results
and could have an adverse effect on the Company’s business, financial condition
and results of operations in the periods in which the inventory is
reduced.
Operating
results may also fluctuate due to a variety of factors, including market
acceptance of the Company’s new lines of products and product enhancements,
delays in new product introductions by the Company, , changes in the mix of
products and or customers, the gain or loss of a significant customer,
competitive price pressures, changes in expenses related to operations, research
and development and marketing associated with existing and new products, and the
general condition of the economy.
All of
the above factors are difficult for the Company to forecast, and these or other
factors can materially and adversely affect the Company’s business, financial
condition and results of operations for one quarter or a series of quarters. The
Company’s expense levels are based in part on its expectations regarding future
sales and are fixed in the short term to a certain extent. Therefore, the
Company may be unable to adjust spending in a timely manner to compensate for
any unexpected shortfall in sales. Any significant decline in demand relative to
the Company’s expectations or any material delay of customer orders could have a
material adverse effect on the Company’s business, financial condition, and
results of operations. There can be no assurance that the Company will be able
to sustain profitability on a quarterly or annual basis. In addition, the
Company has had, and in some future quarter may have operating results below the
expectations of public market analysts and investors. In such event, the price
of the Company’s Common Stock would likely be materially and adversely affected.
See “Potential Volatility of Stock Price”.
Competition.
The markets for
telecommunications network access and multi-service equipment addressed by the
Company’s products can be characterized as highly competitive, with intensive
equipment price pressure. These markets are subject to rapid technological
change, wide-ranging regulatory requirements, the entrance of low cost
manufacturers and the presence of formidable competitors that have greater name
recognition and financial resources. Certain technology such as the V.34 and
digital service units portion of the SpectraComm line are not considered new and
the market has experienced decline in recent years.
Industry
consolidation could lead to competition with fewer, but stronger competitors. In
addition, advanced termination products are emerging, which represent both new
market opportunities, as well as a threat to the Company’s current products.
Furthermore, basic line termination functions are increasingly being integrated
by competitors, such as Cisco and Alcatel/Lucent, into other equipment such as
routers and switches. To the extent that current or potential competitors can
expand their current offerings to include products that have functionality
similar to the Company’s products and planned products, the Company’s business,
financial condition and results of operations could be materially adversely
affected. Many of the Company’s current and potential competitors
have substantially greater technical, financial, manufacturing and marketing
resources than the Company. In addition, many of the Company’s competitors have
long-established relationships with network service providers. There can be no
assurance that the Company will have the financial resources, technical
expertise, manufacturing, marketing, distribution and support capabilities to
compete successfully in the future.
Rapid Technological Change.
The network access and telecommunications equipment markets are
characterized by rapidly changing technologies and frequent new product
introductions. The rapid development of new technologies increases the risk that
current or new competitors could develop products that would reduce the
competitiveness of the Company’s products. The Company’s success will depend to
a substantial degree upon its ability to respond to changes in technology and
customer requirements. This will require the timely selection, development and
marketing of new products and enhancements on a cost-effective basis. The
development of new, technologically advanced products is a complex and uncertain
process, requiring high levels of innovation. The Company has and may need to
supplement its internal expertise and resources with specialized expertise or
intellectual property from third parties to develop new products.
Furthermore,
the communications industry is characterized by the need to design products that
meet industry standards for safety, emissions and network interconnection. With
new and emerging technologies and service offerings from network service
providers, such standards are often changing or unavailable. As a result, there
is a potential for product development delays due to the need for compliance
with new or modified standards. The introduction of new and enhanced products
also requires that the Company manage transitions from older products in order
to minimize disruptions in customer orders, avoid excess inventory of old
products and ensure that adequate supplies of new products can be delivered to
meet customer orders. There can be no assurance that the Company will be
successful in developing, introducing or managing the transition to new or
enhanced products, or that any such products will be responsive to technological
changes or will gain market acceptance. The Company’s business, financial
condition and results of operations would be materially adversely affected if
the Company were to be unsuccessful, or to incur significant delays in
developing and introducing such new products or enhancements. See “Dependence on
Legacy and Recently Introduced Products and New Product
Development”.
Compliance with Regulations
and Evolving Industry Standards.
The market for the Company’s products is
characterized by the need to meet a significant number of communications
regulations and standards, some of which are evolving as new technologies are
deployed. In the United States, the Company’s products must comply with various
regulations defined by the Federal Communications Commission and standards
established by Underwriters Laboratories and Telcordia Technologies, and new
products introduced in the SpectraComm line and other products designed for
telecommunications carrier networks will need to be NEBS Certified. As standards
continue to evolve, the Company will be required to modify its products or
develop and support new versions of its products. The failure of the Company’s
products to comply, or delays in compliance, with the various existing and
evolving industry standards, could delay introduction of the Company’s products,
which could have a material adverse effect on the Company’s business, financial
condition and results of operations.
GDC Will Require Additional Funding
to Sustain Operations.
The Company emerged from Chapter 11 bankruptcy on
September 15, 2003. Under the plan of reorganization, the Company was to pay all
unsecured creditors 100% of their allowed claims based upon a five year business
plan. However, the Company has not met its business plan objectives
since emerging from Chapter 11 and to date such creditors have not received any
payments. The ability to meet the objectives of this business plan is
directly affected by the factors described in this “Risk Factors” section. The
Company cannot assure investors that it will be able to obtain new customers or
to generate the increased revenues required to meet business plan objectives. In
addition, in order to execute the business plan, the Company may need to seek
additional funding through public or private equity offerings, debt financings
or commercial partners. The Company cannot assure investors that it will obtain
funding on acceptable terms, if at all. If the Company is unable to generate
sufficient revenues or access capital on acceptable terms, it may be required to
(a) obtain funds on unfavorable terms that may require the Company to relinquish
rights to certain of its technologies or other assets or that would
significantly dilute its stockholders and/or (b) significantly scale back
current operations. Any of these possibilities would have a material adverse
effect on the Company’s business, financial condition and results of
operations.
Risks Associated With Entry into
International Markets.
The Company has limited experience in
international markets with the exception of a few direct customers and
resellers/integrators and sales into Western Europe through its formerly active
subsidiary in France, which was acquired by the Company in 2005 and
de-activated in 2009. The Company intends to expand sales of its products
outside of North America and to enter certain international markets, which will
require significant management attention and financial resources. Conducting
business outside of North America is subject to certain risks, including longer
payment cycles, unexpected changes in regulatory requirements and tariffs,
difficulties in supporting foreign customers, greater difficulty in accounts
receivable collection and potentially adverse tax consequences. To the extent
any Company sales are denominated in foreign currency, the Company’s sales and
results of operations may also be directly affected by fluctuations in foreign
currency exchange rates. In order to sell its products internationally, the
Company must meet standards established by telecommunications authorities in
various countries. A delay in obtaining, or the failure to obtain,
certification of its products in countries outside the United States could delay
or preclude the Company’s marketing and sales efforts in such countries, which
could have a material adverse effect on the Company’s business, financial
condition and results of operations.
Risk of Third Party Claims of
Infringement.
The network access and telecommunications equipment
industries are characterized by the existence of a large number of patents and
frequent litigation based on allegations of patent infringement. From time to
time, third parties may assert exclusive patent, copyright, trademark and other
intellectual property rights to technologies that are important to the Company.
The Company has not conducted a formal patent search relating to the technology
used in its products, due in part to the high cost and limited benefits of a
formal search. In addition, since patent applications in the United States are
not publicly disclosed until the related patent is issued and foreign patent
applications generally are not publicly disclosed for at least a portion of the
time that they are pending, applications may have been filed which, if issued as
patents, could relate to the Company’s products. Software comprises a
substantial portion of the technology in the Company’s products. The scope of
protection accorded to patents covering software-related inventions is evolving
and is subject to a degree of uncertainty which may increase the risk and cost
to the Company if the Company discovers third party patents related to its
software products or if such patents are asserted against the Company in the
future.
The
Company may receive communications from third parties asserting that the
Company’s products infringe or may infringe the proprietary rights of third
parties. In its distribution agreements, the Company typically agrees to
indemnify its customers for any expenses or liabilities resulting from claimed
infringements of patents, trademarks or copyrights of third parties. In the
event of litigation to determine the validity of any third-party claims, such
litigation, whether or not determined in favor of the Company, could result in
significant expense to the Company and divert the efforts of the Company’s
technical and management personnel from productive tasks. In the event of an
adverse ruling in such litigation, the Company might be required to discontinue
the use and sale of infringing products, expend significant resources to develop
non-infringing technology or obtain licenses from third parties. There can be no
assurance that licenses from third parties would be available on acceptable
terms, if at all. In the event of a successful claim against the Company and the
failure of the Company to develop or license a substitute technology, the
Company’s business, financial condition, and results of operations could be
materially adversely affected.
Limited Protection of Intellectual
Property.
The Company relies upon a combination of patent, trade secret,
copyright, and trademark laws and contractual restrictions to establish and
protect proprietary rights in its products and technologies. The Company has
been issued and has licensed certain U.S., Canadian and other foreign patents
with respect to certain products, including licenses granted under patents sold
in 2008. There can be no assurance that third parties have not or will not
develop equivalent technologies or products without infringing the Company’s
patents and/or patent licenses or that a court having jurisdiction over a
dispute involving such patents would hold the Company’s patents and/or licenses
valid, enforceable and infringed. The Company also typically enters into
confidentiality and invention assignment agreements with its employees and
independent contractors, and non-disclosure agreements with its suppliers,
distributors and appropriate customers so as to limit access to and disclosure
of its proprietary information. There can be no assurance that these statutory
and contractual arrangements will deter misappropriation of the Company’s
technologies or discourage independent third-party development of similar
technologies. In the event such arrangements are insufficient, the Company’s
business, financial condition and results of operations could be materially
adversely affected. The laws of certain foreign countries in which the Company’s
products are or may be developed, manufactured or sold may not protect the
Company’s products or intellectual property rights to the same extent as do the
laws of the United States and thus, make the possibility of misappropriation of
the Company’s technology and products more likely.
Potential Volatility of Stock Price.
The trading price of the Company’s common stock may be subject to wide
fluctuations in response to quarter-to-quarter variations in operating results,
announcements of technological innovations or new products by the Company or its
competitors, developments with respect to patents or proprietary rights, general
conditions in the telecommunication network access and equipment industries,
changes in earnings estimates by analysts, or other events or factors. In
addition, the stock market has experienced extreme price and volume
fluctuations, which have particularly affected the market prices of many
technology companies and which have often been unrelated to the operating
performance of such companies. Company-specific factors or broad market
fluctuations may materially adversely affect the market price of the Company’s
common stock. The Company has experienced
significant fluctuations
in its stock price and share trading volume in the past and may continue to do
so.
The Company is Controlled by a Small
Number of Stockholders and Certain Creditors.
In particular,
Mr. Modlin, Chairman of the Board and Chief Executive Officer, and President of
Weisman Celler Spett & Modlin, P.C., legal counsel for the Company, owns
approximately 73% of the Company’s outstanding shares of Class B
stock and has stock options and warrants that would upon exercise
allow him to own approximately 57% of the Company’s common stock, although all
such options and warrants have exercise prices which are substantially over the
market price of the common stock on January 12, 2010. Furthermore, Mr. Modlin is
also trustee for the benefit of a daughter of Mr. Charles P. Johnson, the former
Chairman of the Board and Chief Executive Officer, and such trust holds
approximately 1.2% of the outstanding shares of Class B stock. Class B stock
under certain circumstances has 10 votes per share in the election of
Directors. The Board of Directors is to consist of no less than three
and no more than thirteen directors, one of which may be designated by the
debenture trustee. The holders of the 9% Preferred Stock are
presently entitled to designate two directors until all arrears on the dividends
on such 9% Preferred Stock are paid in full. To date, the holders of
the 9% Preferred Stock have not designated any directors. In the event of a
payment default under the debentures which is not cured within 60 days after
written notice, the debenture trustee shall be entitled to select a majority of
the Board of Directors. Accordingly, in the absence of a payment
default under the debentures, Mr. Modlin may be able to elect all members of the
Board of Directors not designated by the holders of the 9% Preferred Stock and
the debenture trustee and determine the outcome of certain corporate actions
requiring stockholder approval, such as mergers and acquisitions of the
Company. This level of ownership by such persons and entities could have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of the Company.
Such provisions could limit the price that certain investors might be willing to
pay in the future for shares of the Company’s common stock, thereby making it
less likely that a stockholder will receive a premium in any sale of
shares.
ITEM 1B. UNRESOLVED
STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The
principal facilities of the Company are as follows:
Naugatuck,
CT
|
–executive
offices and operations, a 360,000 square foot facility owned by the
Company (approximately 60% is vacant). Such property is
currently for sale or lease. If such sale were to occur, the Company would
intend to lease facilities in the same geographical
area.
|
ITEM 3. LEGAL
PROCEEDINGS
None.
ITEM 4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not
applicable.
PART
II
ITEM
5.
|
MARKET
FOR THE COMMON EQUITY, RELATED STOCKHOLDER
MATTERS
AND ISSUER PURCHASES OF EQUITY
SECURITIES
|
The
Company’s common stock is quoted on The Pink Sheets under the symbol
“GNRD”. The following table sets forth the range of high and low
sales prices for the Company’s common stock for the periods
indicated:
Fiscal 2009
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
.10
|
|
|
$
|
.03
|
|
Second
Quarter
|
|
|
.03
|
|
|
|
.01
|
|
Third
Quarter
|
|
|
.05
|
|
|
|
.01
|
|
Fourth
Quarter
|
|
|
.04
|
|
|
|
.03
|
|
|
|
|
|
|
|
|
Fiscal 2008
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
.27
|
|
|
$
|
.12
|
|
Second
Quarter
|
|
|
.16
|
|
|
|
.12
|
|
Third
Quarter
|
|
|
.18
|
|
|
|
.14
|
|
Fourth
Quarter
|
|
|
.16
|
|
|
|
.10
|
|
As of
November 30, 2009, the Company had approximately 470 common stockholders of
record. The closing sales price of the Company’s common stock on
November 30, 2009 was $0.03 per share.
No shares
of common stock or Class B stock were sold by the Company for cash during the
two year period ending September 30, 2009.
Reference
is made to Note 3 in the Notes to Consolidated Financial Statements included in
Item 8 of this Form 10-K for description of warrants issued that were associated
with loans from related parties, and to Note 10 for description of awards,
grants and options issued pursuant to the Company’s stock and bonus
plans. All such warrants and stock options are at exercise prices
substantially over the market price of the common stock at January 12,
2010.
No equity
securities were repurchased by the Company during its fiscal years ended
September 30, 2009 and 2008.
Dividend
Policy
The
Company has never paid cash dividends. GDC cannot declare or pay any
dividends on its common stock in the foreseeable future due to provisions
governing the 9% Preferred Stock which prohibit the payment of such dividends
until all arrearages are paid in full. In any event, the Company
presently intends to retain all earnings, if any, to invest in
operations.
ITEM
6.
|
SELECTED
FINANCIAL DATA
|
Not
required for smaller reporting companies.
ITEM
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
THE
FOLLOWING DISCUSSION AND ANALYSIS OF THE COMPANY’S FINANCIAL CONDITION AND THE
RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS ANNUAL REPORT ON FORM
10-K.
THIS
ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED. FOR THIS PURPOSE, STATEMENTS CONTAINED HEREIN THAT ARE NOT
STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING
STATEMENTS. WITHOUT LIMITING THE FOREGOING, THE WORDS “BELIEVES”,
“ANTICIPATES”, “PLANS”, “EXPECTS” AND SIMILAR EXPRESSIONS ARE INTENDED TO
IDENTIFY FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING STATEMENTS
INVOLVE RISKS AND UNCERTAINTIES AND ARE NOT GUARANTEES OF FUTURE PERFORMANCE.
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE INDICATED IN SUCH
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS
INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH UNDER THE HEADING
“RISK FACTORS” IN ITEM 1A TO THIS FORM 10-K. UNLESS REQUIRED BY LAW,
THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENTS OR
REASONS WHY ACTUAL RESULTS MAY DIFFER.
General
The
Company is conducting operations from its owned facility in Naugatuck,
Connecticut and as of November 30, 2009 had 61 employees.
All
references to “Notes” in the following discussion of “Results of Operations” and
“Liquidity and Capital Resources” are to the “Notes to Consolidated Financial
Statements” included in Item 8 in this Form 10-K.
Results of Operations –
Fiscal Year Ended September 30, 2009 (unaudited)
The
Company’s revenues were $8.7 million in fiscal 2009, compared to $11.2 million
in fiscal 2008. The Company has limited financial resources and is operating
only on internally generated cash flows including sales of its accounts
receivables and supplemented with loans from related parties. There
is no commitment from any related parties to provide loans in the
future.
The
Company has over the recent years demonstrated the ability to introduce new
products and services, maintain customer relationships and introduce
manufacturing cost efficiencies. However, the ability of the Company
to generate sufficient operating cash flow is dependent on achieving
satisfactory revenue levels, customer collections, new product and product
feature development, the ability to operate with minimal investment in capital
equipment and software and other significant risks. Reference is made
to Item 1A, “Risk Factors” and the “Liquidity” section below in this Form 10-K
for further discussion of these items.
A
significant portion of the Company’s product revenues in recent years were
derived from the sale of network access and wide area network equipment which
include legacy products, primarily analog and digital data
sets. Approximately 22% of product revenues in fiscal 2009
were provided by such legacy products. The Company anticipates that
sales of legacy products will decline over the next several years while sales of
new products will increase over the same period with significant fluctuations
possible and without assurance that sales of new products will increase over the
same period.
Approximately
46% and 38% of sales of products in fiscal 2009 and 2008, respectively, were
made through integrators, distributors and resellers. Such parties
are normally responsible for warehousing products and fulfilling product orders
as well as identifying potential service providers and other
customers. The balance of the product sales were made through direct
sales to service providers and enterprise customers.
The
Company’s results from operations have fluctuated significantly from
period-to-period in the past and this is expected to continue in the
future. As a result, the Company believes that period-to-period
comparisons of its financial results should not be relied upon as an indication
of future performance.
Revenues
|
|
Year Ended September 30,
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
6,935
|
|
|
$
|
9,041
|
|
Service
|
|
|
1,765
|
|
|
|
2,147
|
|
Total
Revenues
|
|
$
|
8,700
|
|
|
$
|
11,188
|
|
Revenues
for the fiscal year ended September 30, 2009 decreased $2,488,000, to $8,700,000
from $11,188,000 reported for the fiscal year ended September 30,
2008. Product revenues decreased $2,106,000, or 23.3% , while service
revenues decreased $382,000, or 17.8%, from the prior
year.
The
product sales decrease was due to large orders in fiscal 2008 from three
customers for network expansion that did not repeat in fiscal
2009. This resulted in a reduction in sales to these three customers
of $2,908,000. These decreases were offset in part by: shipments of
$1,578,000 under a new contract with a large US telecommunications company of a
new ATM concentrator product, part of the multi-service switch product line; and
by increased shipments of $1,046,000 to an integrator in Italy of new Xedge
multi-service switch products for mission critical military and commercial
applications. Other net decreases of $1,822,000 reflect primarily
lower sales of network access products due to erosion in sales to large
telecommunications carriers as migration to newer technologies continues, and to
a downturn in economic conditions primarily affecting the Company’s US
markets.
In fiscal
2009, sales of the multi-service switch product line were approximately 67% of
product revenue compared to 57% in fiscal 2008, whereas sales
of the network access product line were approximately 33% of product
revenue compared to approximately 43% in fiscal 2008.
The
decrease in service revenue was primarily due to expiration of a service
contract in Europe where the customer transitioned to alternate networking
technology, and to subcontract work for a large telephone company in 2008 that
did not repeat in 2009. Other net changes also reflect the expiration
of contracts offset by new customer contracts.
A decline
in demand for the Company’s products began in fiscal 2001 and was further
negatively impacted in recent years due to economic and industry-wide factors
affecting the telecommunications industry, including financial constraints
affecting customers and over-capacity in customers’
markets. Furthermore, since that time orders for the Company’s
products from telecommunications carriers have continued to decline and the
customer base has migrated to a higher percentage of commercial and government
agency end-users. The general economic downturn in 2009 has resulted
in significant uncertainty about future revenue
levels. Accordingly, the ability to forecast future revenue
trends in the current environment is difficult.
The
Company’s business is characterized by a concentration of sales to a limited
number of key customers. Sales to the Company’s top five customers
accounted for 57% and 54% of revenues in fiscal 2009 and 2008,
respectively. Customers who accounted for 10% or more of revenues in
fiscal 2009 were AT&T Global Networks (20%), a worldwide telecomm provider,
and NEC Philips, a large integrator in Italy (19%). The Company’s
customers who accounted for 10% or more of revenue in fiscal 2008 was Thales
Communications (15%) and the City of Los Angeles (10%).
The
Company sells its products and services in the United States and Canada
primarily through a direct sales force and through a variety of resellers,
integrators, and distributors. Sales to resellers, distributors and
integrators accounted for approximately 46% and 38% of product sales in fiscal
2009 and 2008, respectively. The balance of the sales of products and services
were made through direct sales to service providers and enterprise
customers. Foreign revenues were 37% and 30% of total revenue in the
fiscal years ended September 30, 2009 and 2008, respectively.
Gross
Margin
|
|
Year Ended September 30,
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
2,325
|
|
|
$
|
4,523
|
|
Service
|
|
|
1,089
|
|
|
|
644
|
|
Total
Gross Margin
|
|
|
3,414
|
|
|
|
5,167
|
|
|
|
|
|
|
|
|
|
|
Percentage
of Product Revenues
|
|
|
33.5
|
%
|
|
|
50.0
|
%
|
Percentage
of Service Revenues
|
|
|
61.7
|
%
|
|
|
30.0
|
%
|
Percentage
of Total Revenues
|
|
|
39.2
|
%
|
|
|
46.2
|
%
|
Gross
margin, as a percentage of revenues, in the fiscal year ended September 30, 2009
was 39.2% as compared to 46.2% in the fiscal year ended September 30, 2008, a
decrease of 7.0%.
Product
gross margin, as a percentage of product revenues, decreased
16.5%. Competitive pricing on a new contract and related higher
start-up costs on a new multi-service switch product contributed to a 7.4%
reduction in gross profit margin, manufacturing inefficiencies associated with
lower sales volumes contributed 9.6% to the gross margin reduction and higher
relative inventory obsolescence reserves contributed another 1.0% to the gross
margin reduction. Offsetting these decreases was the greater
favorable impact of selling inventories previously written down of 1.2% and
other net items of 0.3%.
Service
gross margin, as a percentage of service revenues, increased
31.7%. The improvement was due to operating cost reductions
offsetting the reduced revenue level. Cost reductions resulted from
the service organization being restructured and, in some cases reallocated to
sales support functions, to adjust to a lower revenue stream from recurring
contracts. Compensation cost reductions and related expenses,
along with lower use of outside contractors, accounted for most of the
reduction.
In future
periods, the Company’s gross margin will vary depending upon a number of
factors, including the mix of products and services sold, the cost of products
manufactured at subcontract facilities, the channels of distribution, the price
of products and services sold, discounting practices, price competition,
increases in material costs and changes in other components of cost of
sales. As and to the extent the Company introduces new products, it
is possible that such products may have lower gross profit margins than other
established products in higher volume production. Accordingly, gross
margin as a percentage of sales may vary.
Selling,
General and Administrative
|
|
Year Ended September 30,
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
$
|
4,539
|
|
|
$
|
6,253
|
|
|
|
|
|
|
|
|
|
|
Percentage
of revenues
|
|
|
52.2
|
%
|
|
|
55.9
|
%
|
The
Company’s selling, general and administrative expenses decreased to $4,539,000,
or 52.2% of revenues in the fiscal year ended September 30, 2009 from
$6,253,000, or 55.9% of revenues in the fiscal year ended September 30,
2008. The decrease in spending in the year of $1,714,000,
or 27.4%, was primarily a result of lower compensation costs of $1,704,000 due
to salary and benefit reductions, including job eliminations, for sales and
administrative staff, along with lower commissions resulting from lower
revenues. In addition, professional fees were lower by $196,000 due
to lower anticipated audit fees and a reduction in legal support
activities. A decrease of $148,000 was due to a reduction in travel
expense. Other net reductions were $41,000. These
reductions were offset by a charge of $375,000 for restructuring of the
Company’s European operations (see Note 15).
Research
and Product Development
|
|
Year Ended September 30,
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Research
and product development
|
|
$
|
1,661
|
|
|
$
|
3,232
|
|
|
|
|
|
|
|
|
|
|
Percentage
of revenues
|
|
|
19.1
|
%
|
|
|
28.9
|
%
|
Research
and product development expenses decreased to $1,661,000, or 19.1% of revenues
in the fiscal year ended September 30, 2009, as compared to $3,232,000, or 28.9%
of revenues in the fiscal year ended September 30, 2008. The decrease
in spending in the year of $1,571,000, or 48.6%, was primarily the result of
lower compensation costs of $1,315,000 due to salary and benefit reductions
taken by the engineering staff, and headcount reductions resulting from a
combination of attrition and lay-offs. In addition, there were lower
costs of outside contractors of $91,000 as development projects were
completed. Other net reductions were $165,000.
Interest
Expense
Interest
expense decreased to $2,885,000 in the fiscal year ended September 30, 2009 from
$2,904,000 in the fiscal year ended September 30, 2008. The decreased
interest charges of $19,000 resulted primarily from lower fee amortization
partially offset by a higher interest rate on the real estate mortgage, which
rate became effective January 1, 2009 when the mortgage was
amended.
The
Company is currently only making interest payments on the real estate mortgage,
which amounted to $497,000 and $ 444,000 in the years ended September 30, 2009
and 2008, respectively.
Other
Income (Expense)
Other
income (expense) for the fiscal year ended September 30, 2009 and 2008 totaled
$57,000 and $4,018,000, respectively. The 2009 amount includes
$124,000 resulting from the favorable settlement of bankruptcy claims, $50,000
received in a legal settlement, $86,000 received from a tradename license and
$24,000 of other net income items, offset by $190,000 of discount associated
with the sales of accounts receivable and $37,000 of realized foreign exchange
losses. The 2008 amount includes $3,891,000 from the gain on the sale
of patents, $64,000 received from a tradename license and $100,000 from a
negotiated professional fee reduction, offset by $37,000 in other net
expenses.
Provision
for Income Taxes
The
income tax provision for the fiscal year ended September 30, 2009 reflects a
benefit of $46,000 and includes $37,000 related to a refund of prior years’
general business credit under provisions of the U.S. Housing and
Economic Recovery Act of 2008, and a benefit of $21,000 resulting from a
reduction in reserves for state taxes due to expiration of time in which to make
claims by taxing authorities, offset by $12,000 in current state tax
liabilities. The income tax provision for the fiscal year ended
September 30, 2008 reflects a benefit in the amount of $169,000 and includes a
reduction of $176,000 of possible tax liabilities deemed no longer required due
to expiration of time in which to make claims by taxing authorities, offset by
$7,000 in current state tax liabilities.
No
federal income tax provisions or other tax benefits were provided in fiscal 2009
and 2008 due to the valuation allowance provided against deferred tax
assets. The Company established a full valuation allowance against
its net deferred tax assets due to the uncertainty of realization of benefits of
the net operating loss carry forwards from prior years and the net loss incurred
in fiscal 2009. The Company has federal tax credit and net operating
loss carry forwards of approximately $11.8 million and $214.4 million,
respectively, at September 30, 2009.
Critical
Accounting Policies
The
Company’s financial statements and accompanying notes are prepared in accordance
with generally accepted accounting principles in the United States of America,
the instructions to Form 10-K and Regulation S-X. Preparing financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and
expenses. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under
the circumstances. Due to the inherent uncertainty involved in making
estimates, actual results reported in future periods might be based upon amounts
that differ from those estimates.
FASB Codification
Discussion
The
Company follows accounting standards set by the Financial Accounting Standards
Board, commonly referred to as the “FASB”. The FASB sets generally
accepted accounting principles (GAAP) that the Company follows to ensure
consistent reporting of the Company’s financial condition, results of
operations, and cash flows. Over the years, the FASB and other
designated GAAP-setting bodies, have issued standards which include FASB
Statements, Interpretations, FASB Staff Positions, EITF consensuses, and AICPA
Statements of Position.
The FASB
recognized the complexity of its standard-setting process and embarked on a
revised
process
in 2004 that culminated in the release on July 1, 2009, of the
FASB Accounting Standards
Codification
TM
,
sometimes
referred to as the Codification or ASC. The Codification does not
change how the Company accounts for its transactions or the nature of related
disclosures made. However, when referring to guidance issued by the
FASB, reference is made to topics in the ASC rather than to FASB Statements,
etc. The above change was made effective by the FASB for periods
ending on or after September 15, 2009.
The
following represent what the Company believes are among the critical accounting
policies most affected by significant management estimates and
judgments. See Note 2 in Notes to Consolidated Financial Statements
in Item 8 in this Form 10-K for a summary of the Company’s significant
accounting policies.
Revenue
Recognition
. The Company recognizes a sale when the product is
shipped or thereafter, and the following four criteria are met: (1)
persuasive evidence of an arrangement exists; (2) title and risk of loss
transfers to the customer; (3) the selling price is fixed or determinable; and
(4) collectibility is reasonably assured. A reserve for future
product returns is established at the time of the sale based on historical
return rates and return policies including stock rotation for sales to
distributors that maintain a stock of the Company’s products. Service
revenue is either recognized when the service is performed or, in the case of
maintenance contracts, on a straight-line basis over the term of the
contract.
Warranty Reserves.
The
Company offers warranties of various lengths to its customers depending on the
specific product and the terms of its customer purchase
agreements. Standard warranties require the Company to repair or
replace defective product returned during the warranty period at no cost to the
customer. An estimate for warranty related costs is recorded based on
actual historical return rates and repair costs at the time of
sale. On an on-going basis, management reviews these estimates
against actual expenses and makes adjustments when necessary. While
warranty costs have historically been within expectations of the provision
established, there is no guarantee that the Company will continue to experience
the same warranty return rates or repair costs as in the past. A
significant increase in product return rates or the costs to repair our products
would have a material adverse impact on the Company’s operating
results.
Allowance for Doubtful
Accounts
. The Company estimates losses resulting from the
inability of its customers to make payments for amounts billed. The
collectability of outstanding invoices is continually
assessed. Assumptions are made regarding the customer’s ability and
intent to pay, and are based on historical trends, general economic conditions
and current customer data. Should actual experience with respect to
collections differ from these assessments, there could be adjustments to the
allowance for doubtful accounts.
Inventories
. The
Company values inventory at the lower of cost or market. Cost is
computed using standard cost, which approximates actual cost on a first-in,
first-out basis. Agreements with certain customers provide for return
rights. The Company is able to reasonably estimate these returns and
they are accrued for at the time of shipment. Inventory quantities on
hand are reviewed on a quarterly basis and a provision for excess and obsolete
inventory is recorded based primarily on product demand for the preceding twelve
months. Historical product demand may prove to be an inaccurate
indicator of future demand in which case the Company may increase or decrease
the provision required for excess and obsolete inventory in future
periods. Furthermore, if the Company is able to sell inventory in the
future that has been previously written down or off, such sales will result in
higher than normal gross margin.
Deferred Tax
Assets.
The Company has provided a full valuation allowance
related to its deferred tax assets. In the future, if sufficient
evidence of the Company’s ability to generate sufficient future taxable income
in certain tax jurisdictions becomes apparent, the Company will be required to
reduce its valuation allowances, resulting in income tax benefits in the
Company’s consolidated statement of operations. Management evaluates
the realizability of the deferred tax assets and assesses the need for the
valuation allowance each year.
Impairment of Long-Lived
Assets
. The Company assesses the impairment of long-lived
assets whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. The Company's long-lived assets consist
of real estate, equipment and other personal property. Through
September 30, 2009, real estate represented the only long-lived asset that had,
in prior years, been written down for impairment.
Recently
Issued Accounting Standards
In
September 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-06,
Income Taxes
, which
provided implementation guidance on the accounting for uncertainty in income
taxes and disclosure amendments for nonpublic entities. The adoption
of the implementation guidance will not have an impact on the Company’s
consolidated financial statements and disclosures.
In June
2009, the FASB issued FASB ASC 105,
Generally Accepted Accounting
Principles,
which establishes the FASB Accounting Standards Codification,
referred to above in
“Critical
Accounting Policies”,
as the sole source of authoritative generally
accepted accounting principles (“GAAP”). Pursuant to the provisions
of FASB ASC 105, the Company has updated references to GAAP in its financial
statements issued for the period ended September 30, 2009. The
adoption of FASB ASC 105 did not impact the Company’s financial position or
results of operations.
In May
2009, the FASB issued guidance related to changes to accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued, otherwise known
as “subsequent events”. In particular, these changes set forth (i)
the period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that my occur, (ii) the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date and (iii) the disclosures that an entity
should make about events or transactions that occurred after the balance sheet
date. This guidance introduces the concept of financial statements
being available to be issued. It requires the disclosure of (i) the
date through which an entity has evaluated subsequent events and (ii) the basis
for that date, that is, whether that date represents the date the financial
statements were issued or were available to be issued. This guidance
should not result in significant changes in the subsequent events that an entity
reports in its financial statements and does not apply to subsequent events or
transactions that are within the scope of other applicable generally accepted
accounting principles that provide different guidance on the accounting
treatment for subsequent events or transactions. The adoption of
these changes had no significant impact to the financial statements of the
Company.
In
December 2008, the FASB issued guidance related to employers’ disclosure about
postretirement benefit plan assets. Such disclosures should provide
users of financial statements with an understanding of (i) how investment
allocation decisions are made, (ii) major categories of plan assets, (iii) how
fair value of plan assets are measured , (iv) the effect of fair value
measurements on changes in plan assets during a period and (v) significant
concentrations of risk within plan assets. The requirements of this
new disclosure about plan assets shall be provided for fiscal years ending after
December 15, 2009.
Liquidity
and Capital Resources
|
|
September 30,
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
79
|
|
|
$
|
136
|
|
Working
capital (deficit)
|
|
|
(38,199
|
)
|
|
|
(32,992
|
)
|
Total
assets
|
|
|
6,410
|
|
|
|
8,422
|
|
Long-term
debt, including current portion
|
|
|
26,663
|
|
|
|
26,472
|
|
Total
liabilities
|
|
|
46,269
|
|
|
|
42,774
|
|
|
|
Year Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
Net
cash provided (used) by:
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
(299
|
)
|
|
$
|
(4,939
|
)
|
Investing
activities
|
|
|
(35
|
)
|
|
|
3,625
|
|
Financing
activities
|
|
|
277
|
|
|
|
154
|
|
Note: Significant
risk factors exist due to the Company’s limited financial resources and its
present inability to repay its senior debt and its debentures which matured on
October 1, 2008. See Item 1A, “Risk Factors” for further
discussion.
Fiscal
2009
Net cash
used by operating activities totaled $299,000 in the fiscal year ended September
30, 2009. The net loss in the period was
$5,568,000. Included in this net loss were non-cash expenses for
depreciation and amoritization of $364,000 and stock compensation expense of
$118,000. A decrease in accounts receivable due to levels
of customer collections and sales (to a related party) of accounts receivable
being higher than new sales levels resulted in a source of cash of
$729,000. Inventories were lower by $738,000 as the Company was able
to achieve shipments of on-hand inventories to satisfy new customer orders and
generate a source of cash through reduced purchasing. The sale of
accounts receivable to be invoiced (to a related party) resulted in a source of
cash of $888,000. Unpaid interest which accrued on the Company’s debt
increased $2,174,000 as a source of cash. Unpaid professional fees, primarily to
a related party, increased $229,000 as a source of funds. A reduction
in deferred income on service contracts of $395,000 due to older contracts
expiring and not being renewed resulted in a use of cash. Other net sources of
cash were $426,000.
Cash used
by investing activities in the fiscal year ended September 30, 2009 was $35,000
for the acquisition of equipment.
Net cash
provided by financing activities in the year ended September 30, 2009 was
$277,000. Proceeds from notes payable to a related party of $250,000
and from notes payable to an unrelated party of $234,000 were offset by payments
on a note payable to an unrelated party of $207,000.
Fiscal
2008
Net cash
used in operating activities totaled $4,939,000 in the fiscal year ended
September 30, 2008.
The net
loss in the period was $3,035,000. Included in this net loss were a
net gain of $3,891,000 related to the sale of patents and non-cash expenses for
depreciation and amortization of $309,000 and stock compensation expense of
$230,000. Unpaid interest which accrued on the Company’s debt
increased $1,644,000 as a result of additional interest charges of $2,920,000
reduced by interest payments to related parties of $458,000 and to others of
$818,000. A decrease in accounts receivable due to customer
collection levels being higher than new sales levels resulted in a source of
cash of $718,000. Inventories were higher and resulted in a use of
cash of $407,000 as the Company prepared to ship anticipated orders with short
delivery times. Other net uses of cash included a reduction in
accounts payable and accrued expenses of $295,000 due to payments of
installments of prior year tax claims in the amount of $178,000 and net
reductions in amounts owed to suppliers and others. Other sources of
cash totaled $212,000.
Net cash
provided by investing activities of $3,625,000 in the year ended September 30,
2008 is comprised of net proceeds from the sale of patents of $3,891,000, offset
in part by $266,000 used for the acquisition of equipment.
Net cash
provided by financing activities of $154,000 in the year ended September 30,
2008 is comprised of proceeds from notes payable to related parties of $550,000
and from other notes payable of $226,000, offset in part by payments on notes
payable to related parties of $395,000 and on other notes payable of
$227,000.
Liquidity
and Going Concern
The
Company incurred a net loss and used a significant amount of cash in its
operating activities for the year ended September 30, 2009. The
Company has no current ability to borrow or otherwise secure additional funds
except as may be provided pursuant to a receivable sales agreement with a
related party. It must, therefore, fund operations from cash
balances, cash generated from operating activities and any cash that may be
generated from the sale of non-core assets such as real estate and
others. In addition, at September 30, 2009 the Company had a
stockholders’ deficit of approximately $39.9 million, and a working capital
deficit of approximately $38.2 million, including debentures in the principal
amount of $19.4 million, together with accrued interest thereon ($11.7 million),
which matured on October 1, 2008. While a subordinated security
agreement signed by the indenture trustee on behalf of the debenture holders
provides that no payments may be made to debenture holders, and that no event of
default may be declared under the indenture, while senior secured debt is
outstanding, in the absence of such restrictions the Company does not have the
ability to repay the debentures. As of September 30, 2009, senior
secured debt consists of notes payable to related parties and a real estate
mortgage. A failure to pay the debentures when they become due and
payable as described above, could result in an event of default being declared
under the indenture governing the debentures.
The
conditions described above raise substantial doubt about the Company’s ability
to continue as a going concern. To continue operations, management
has responded by entering into a receivable sales agreement with a related party
to provide liquidity and by implementing operational changes, including closing
its foreign offices, reducing certain salaries, restructuring the sales force,
increasing factory and office shutdown time, constraining expenses and reducing
the employee workforce. The Company also continues to pursue the sale
or lease of its headquarters’ land and building in Naugatuck, CT.
The
Company’s contractual cash obligations including interest, as of September 30,
2009, are as follows:
|
|
P
AYMENTS DUE BY PERIOD
|
|
|
|
(in thousands)
|
|
|
|
Total
|
|
|
Fiscal 2010
|
|
|
Fiscal 2011
|
|
|
|
|
|
|
|
|
|
|
|
Real
Estate Mortgage
|
|
$
|
5,594
|
|
|
$
|
600
|
|
|
$
|
4,994
|
|
Related
Parties
|
|
|
3,406
|
|
|
|
3,406
|
|
|
|
-
|
|
Priority
Tax Claims
|
|
|
488
|
|
|
|
488
|
|
|
|
-
|
|
Debentures
|
|
|
31,090
|
|
|
|
31,090
|
|
|
|
-
|
|
Note
Payable
|
|
|
42
|
|
|
|
42
|
|
|
|
-
|
|
Operating
Leases
|
|
|
16
|
|
|
|
16
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Contractual Cash Obligations
|
|
$
|
40,636
|
|
|
$
|
35,642
|
|
|
$
|
4,994
|
|
The real
estate mortgage, related party debt and debentures are subject to acceleration
in the event of a payment default by the Company with respect to such obligation
that is not cured. A default under the real estate mortgage would be
a cross-default to the related party debt. No demand for payment of
related party debt has been made though presently due and
payable. There can be no assurance that the Company will be able to
avoid a payment default in the future. Furthermore, the Company has
not paid priority tax claims in the amount of $488,000 that were due on or
before September 15, 2009.
The real
estate mortgage, entered into July 30, 2007, provides for monthly payments of
interest only and the principal amount is payable in full on July 31, 2011, as
amended.
Debenture interest
accrues at the rate of 10% and the outstanding balance of principal and interest
matured on October 1, 2008. For discussion of a potential default on
debentures, see “Risk Factors” in Section 1A of this Form 10-K.
See Notes
3 and 16 in the Notes to Consolidated Financial Statements included in Item 8 in
this Form 10-K for additional information on certain contractual cash
obligations.
The
Company has no off balance sheet arrangements.
ITEM 7A. QUANTITIVE
AND QUALITIVE DISCLOSURES ABOUT MARKET RISK
Market
risk represents the risk of loss that impacts the Company’s financial position,
results of operations or cash flows due to adverse changes in financial and
commodity market prices and interest rates.
Historically
the Company has had little or no exposure to market risk in the area of changes
in foreign currency except to the extent the Company invoices customers in
foreign currencies and is, therefore, subject to foreign currency exchange rate
risk on any individual invoice while it remains unpaid, a period that normally
is less than 90 days. At September 30, 2009 such accounts
receivable were not significant.
The
interest rate on the Company’s $4.5 million real estate mortgage is based upon
the London Interbank Borrowing Rate which may result in a different rate of
interest being charged than if such interest was based on the U.S. bank prime
lending rate.
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS
|
The financial statements of the Company
for the fiscal years ended September 30, 2009 and 2008 have not been audited.
The Company has limited financial resources and had been negotiating audit fees
with its audit firm. The negotiations delayed the start of the fiscal 2008 audit
and on January 5, 2009 the audit firm terminated its audit relationship with the
Company. The Company filed a Form 8-K to disclose this matter. The predecessor
audit firm had not commenced its audit of the Company’s 2008 year-end financial
statements, but had completed its reviews of the Company’s condensed financial
statements included in Form 10-Q for each of the first three quarters of fiscal
2008. The condensed financial statements included in Form 10-Q for
each of the first three quarters of fiscal 2009 have not been reviewed by an
independent auditor. The Company is in the process of appointing new
auditors but is currently unable to finalize this appointment due to limited
financial resources for the payment of the audit fees
.
|
|
PAGE
|
|
|
|
CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED):
|
|
|
|
|
|
CONSOLIDATED
BALANCE SHEETS AS OF SEPTEMBER 30, 2009 AND 2008
|
|
27
|
|
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 2009
AND 2008
|
|
28
|
|
|
|
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS’ DEFICIT
FOR THE YEARS ENDED SEPTEMBER 30,
2009 AND 2008
|
|
29
|
|
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND
2008
|
|
30
|
General
DataComm Industries, Inc. and Subsidiaries
Consolidated
Balance Sheets
(Unaudited)
(In thousands except shares)
|
|
|
|
|
|
|
September 30,
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
79
|
|
|
$
|
136
|
|
Accounts
receivable, less allowance for doubtful receivables of $224 in 2009 and
$228 in 2008
|
|
|
264
|
|
|
|
993
|
|
Inventories
|
|
|
2,435
|
|
|
|
3,173
|
|
Other
current assets
|
|
|
323
|
|
|
|
482
|
|
Total
current assets
|
|
|
3,101
|
|
|
|
4,784
|
|
Property,
plant and equipment, net
|
|
|
3,309
|
|
|
|
3,638
|
|
Total
Assets
|
|
$
|
6,410
|
|
|
$
|
8,422
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Deficit:
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt (including $2,756 owed to related
parties in 2009
and
$2,505 in 2008)
|
|
$
|
22,163
|
|
|
$
|
21,972
|
|
Accounts
payable (including $1,534 owed to a related party in 2009 and $1,304 in
2008)
|
|
|
3,014
|
|
|
|
2,580
|
|
Accrued
payroll and payroll-related costs
|
|
|
461
|
|
|
|
552
|
|
Accrued
interest (including $375 owed to related parties in 2009 and $112 in
2008)
|
|
|
12,189
|
|
|
|
10,015
|
|
Other
current liabilities (including $888 owed to a related party in
2009)
|
|
|
3,473
|
|
|
|
2,657
|
|
Total
current liabilities
|
|
|
41,300
|
|
|
|
37,776
|
|
Long
term debt, less current portion
|
|
|
4,500
|
|
|
|
4,500
|
|
Other
liabilities
|
|
|
469
|
|
|
|
498
|
|
Total
Liabilities
|
|
|
46,269
|
|
|
|
42,774
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Notes 16 and 17)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
deficit:
|
|
|
|
|
|
|
|
|
9%
Preferred stock, par value $1.00 per share, 3,000,000 shares authorized;
781,996 shares issued and outstanding; $35.8 million liquidation
preference, including $16.3 million of cumulative dividend arrearages, at
September 30, 2009
|
|
|
782
|
|
|
|
782
|
|
Class
B stock, par value $.01 per share, 5,000,000 shares
authorized;
634,615
shares issued and outstanding
|
|
|
6
|
|
|
|
6
|
|
Common
stock, par value $.01 per share, 25,000,000 shares authorized; 3,487,473
shares issued and outstanding
|
|
|
35
|
|
|
|
35
|
|
Capital
in excess of par value
|
|
|
199,369
|
|
|
|
199,251
|
|
Accumulated
deficit
|
|
|
(240,054
|
)
|
|
|
(234,486
|
)
|
Accumulated
other comprehensive income
|
|
|
3
|
|
|
|
60
|
|
Total
Stockholders’ Deficit
|
|
|
(39,859
|
)
|
|
|
(34,352
|
)
|
Total
Liabilities and Stockholders’ Deficit
|
|
$
|
6
,410
|
|
|
$
|
8,422
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
General
DataComm Industries, Inc. and Subsidiaries
Consolidated
Statements of Operations
(Unaudited)
(In thousands except share data)
|
|
|
|
|
|
|
Year ended September 30,
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
Product
|
|
$
|
6,935
|
|
|
$
|
9,041
|
|
Service
|
|
|
1,765
|
|
|
|
2,147
|
|
Total
|
|
|
8,700
|
|
|
|
11,188
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
Product
|
|
|
4,610
|
|
|
|
4,518
|
|
Service
|
|
|
676
|
|
|
|
1,503
|
|
Total
|
|
|
5,286
|
|
|
|
6,021
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
3,414
|
|
|
|
5,167
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
4,539
|
|
|
|
6,253
|
|
Research
and product development
|
|
|
1,661
|
|
|
|
3,232
|
|
|
|
|
6,200
|
|
|
|
9,485
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(2,786
|
)
|
|
|
(4,318
|
)
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(2885
|
)
|
|
|
(2,904
|
)
|
Gain
on sale of patents
|
|
|
|
|
|
|
3,891
|
|
Other
income, net
|
|
|
57
|
|
|
|
127
|
|
|
|
|
|
|
|
|
|
|
Loss before income
taxes
|
|
|
(5,614
|
)
|
|
|
(3,204
|
)
|
|
|
|
|
|
|
|
|
|
Income
tax benefit
|
|
|
(46
|
)
|
|
|
(169
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(5,568
|
)
|
|
|
(3,035
|
)
|
Dividends
applicable to preferred stock
|
|
|
(1,760
|
)
|
|
|
(1,760
|
)
|
Net
loss applicable to common and Class B stock
|
|
$
|
(7,328
|
)
|
|
$
|
(4,795
|
)
|
|
|
|
|
|
|
|
|
|
Loss
per share:
|
|
|
|
|
|
|
|
|
Basic
and diluted-common stock
|
|
$
|
(1.78
|
)
|
|
$
|
(1.16
|
)
|
Basic
and diluted-Class B stock
|
|
$
|
(1.78
|
)
|
|
$
|
(1.16
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common and Class B shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
and diluted-common stock
|
|
|
3,487,473
|
|
|
|
3,483,071
|
|
Basic
and diluted-Class B stock
|
|
|
634,615
|
|
|
|
639,017
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
General
DataComm Industries Inc. and Subsidiaries
Consolidated
Statements of Stockholders’ Deficit
(Unaudited)
(in
Thousands, Except Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Total
|
|
|
|
Income
|
|
|
9% Preferred Stock
|
|
|
Class B Stock
|
|
|
Common Stock
|
|
|
In Excess
|
|
|
Accumulated
|
|
|
Other
Comprehensive
|
|
|
Stock-
holders
|
|
|
|
(Loss)
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
of Par
|
|
|
Deficit
|
|
|
Income (Loss)*
|
|
|
Deficit
|
|
Balance
September 30, 2007
|
|
|
|
|
|
781,996
|
|
|
$
|
782
|
|
|
|
647,715
|
|
|
$
|
6
|
|
|
|
3,474,373
|
|
|
$
|
35
|
|
|
$
|
199,021
|
|
|
$
|
(231,601
|
)
|
|
$
|
25
|
|
|
$
|
(31,732
|
)
|
Adoption
of FIN 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150
|
|
|
|
|
|
|
|
150
|
|
Comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(3,035
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,035
|
)
|
|
|
|
|
|
|
(3,035
|
)
|
Foreign
currency translation adjustments
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
35
|
|
Comprehensive loss
|
|
$
|
(3,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of Class B stock to common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,100
|
)
|
|
|
-
|
|
|
|
13,100
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
230
|
|
|
|
|
|
|
|
|
|
|
|
230
|
|
Balance
September 30, 2008
|
|
|
|
|
|
|
781,996
|
|
|
$
|
782
|
|
|
|
634,615
|
|
|
$
|
6
|
|
|
|
3,487,473
|
|
|
$
|
35
|
|
|
$
|
199,251
|
|
|
$
|
(234,486
|
)
|
|
$
|
60
|
|
|
$
|
(34,352
|
)
|
Comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(5,568
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,568
|
)
|
|
|
|
|
|
|
(5,568
|
)
|
Foreign
currency translation adjustments
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(57
|
)
|
|
|
(57
|
)
|
Comprehensive loss
|
|
$
|
(5,625
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
|
118
|
|
Balance
September 30, 2009
|
|
|
|
|
|
|
781,996
|
|
|
$
|
782
|
|
|
|
634,615
|
|
|
$
|
6
|
|
|
|
3,487,473
|
|
|
$
|
35
|
|
|
$
|
199,369
|
|
|
$
|
(240,054
|
)
|
|
$
|
3
|
|
|
$
|
(39,859
|
)
|
|
*
|
“Accumulated
Other Comprehensive Income (Loss)” is comprised solely of foreign currency
translation adjustments; there is no income tax expense
or
benefit
associated with such adjustments.
|
The
accompanying notes are an integral part of these consolidated financial
statements.
General
DataComm Industries, Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
(Unaudited)
(In thousands)
|
|
|
|
|
|
|
Year ended September 30,
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(5,568
|
)
|
|
$
|
(3,035
|
)
|
Adjustments
to reconcile net loss to net cash used by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
364
|
|
|
|
309
|
|
Stock
compensation expense
|
|
|
118
|
|
|
|
230
|
|
Gain
on sale of patents
|
|
|
-
|
|
|
|
(3,891
|
)
|
Reduction
in liability for income taxes
|
|
|
(17
|
)
|
|
|
(176
|
)
|
Changes
in:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
729
|
|
|
|
718
|
|
Inventories
|
|
|
738
|
|
|
|
(407
|
)
|
Accounts
payable
|
|
|
434
|
|
|
|
(230
|
)
|
Accrued
payroll and payroll-related costs
|
|
|
(91
|
)
|
|
|
(13
|
)
|
Accrued
interest
|
|
|
2,174
|
|
|
|
1,644
|
|
Other
net current liabilities
|
|
|
906
|
|
|
|
168
|
|
Other
net long-term liabilities
|
|
|
(86
|
)
|
|
|
(256
|
)
|
|
|
|
|
|
|
|
|
|
Net
cash used by operating activities
|
|
|
(299
|
)
|
|
|
(4,939
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Acquisition
of property, plant and equipment, net
|
|
|
(35
|
)
|
|
|
(266
|
)
|
Net
proceeds from sale of patents
|
|
|
-
|
|
|
|
3,891
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided (used) by investing activities
|
|
|
(35
|
)
|
|
|
3,625
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from notes payable to related parties
|
|
|
250
|
|
|
|
550
|
|
Principal
payments on notes payable to related parties
|
|
|
-
|
|
|
|
(395
|
)
|
Proceeds
from notes payable to unrelated party
|
|
|
234
|
|
|
|
226
|
|
Principal
payments on notes payable to unrelated party
|
|
|
(207
|
)
|
|
|
(227
|
)
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
277
|
|
|
|
154
|
|
|
|
|
|
|
|
|
|
|
Net decrease
in cash and cash equivalents
|
|
|
(57
|
)
|
|
|
(1,160
|
)
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of year
|
|
|
136
|
|
|
|
1,296
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of year
|
|
$
|
79
|
|
|
$
|
136
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
497
|
|
|
$
|
980
|
|
Income
and franchise taxes
|
|
$
|
10
|
|
|
$
|
6
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
General
DataComm Industries, Inc.
Notes
to Consolidated Financial Statements
(Unaudited)
1. Liquidity
and Going Concern
On
November 2, 2001 General DataComm Industries, Inc. and its domestic subsidiaries
filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in
the United States Bankruptcy Court for the District of Delaware. The
Company continued in possession of its properties and the management of its
business as debtors in possession. The Company emerged from Chapter
11 effective on September 15, 2003 pursuant to a court-approved plan of
reorganization. Under this plan, the Company was to pay all creditors
100% of their allowed claims based upon a five year business
plan. Debentures were issued to unsecured creditors as
part of the plan of reorganization. However, the Company has not met
its business plan objectives since emerging from Chapter 11 and, therefore,
there can be no assurance that any such outstanding claims will be
paid.
The
Company incurred a net loss and used a significant amount of cash in its
operating activities for the year ended September 30, 2009. The
Company has no current ability to borrow or otherwise secure additional
funds. It must, therefore, fund operations from cash balances, cash
generated from operating activities including the sale of its accounts
receivable and any cash that may be generated from the sale of non-core assets
such as real estate and others. In addition, at September
30, 2009 the Company had a stockholders’ deficit of approximately
$39.9 million and a working capital deficit of approximately $38.2
million, including debentures in the principal amount of $19.4
million, together with accrued interest thereon ($11.7 million), which matured
on October 1, 2008. While a subordinated security agreement signed by
the indenture trustee on behalf of the debenture holders provides that no
payments may be made to debenture holders, and that no event of default may be
declared under the indenture, while senior secured debt is outstanding, in the
absence of such restrictions the Company does not have the ability to repay the
debentures. As of September 30, 2009, senior secured debt consists of
notes payable to related parties and a real estate mortgage. A
failure to pay the debentures when they become due and payable as described
above, could result in an event of default being declared under the indenture
governing the debentures.
The
conditions described above raise substantial doubt about the Company’s ability
to continue as a going concern. To continue operations, management
has responded by entering into a receivables sales agreement with a related
party to provide liquidity and by implementing operational changes,
including closing its foreign offices, reducing certain salaries, restructuring
the sales force, increasing factory and office shutdown time, constraining
expenses and reducing the employee workforce. The Company also
continues to pursue the sale or lease of its headquarters’ land and building in
Naugatuck, CT.
While the
Company is aggressively pursuing opportunities and corrective actions, there can
be no assurance that the Company will be successful in its efforts to generate
sufficient cash from operations or asset sales, obtain additional funding
sources or resolve the repayment of the debentures. The accompanying
consolidated financial statements have been prepared assuming that the Company
will continue as a going concern and do not include any adjustments that may
result from the outcome of this uncertainty.
2. Description
of Business and Summary of Significant Accounting Policies
Description
of Business
The Company is a provider of networking
and telecommunications products, services and solutions to domestic and
international customers. The Company is focused on providing
multi-service provisioning solutions using multi-service access and switching
products. The Company designs, assembles, markets, installs and
maintains products that enable telecommunications common carriers, corporations
and governments to build, improve and more cost effectively manage their global
telecommunications networks. For further description of the
business, refer to Item 1 “Business” in Part I of this Form
10-K.
The
Company follows accounting standards set by the Financial Accounting Standards
Board, commonly referred to as the “FASB.” The FASB sets generally
accepted accounting principles (GAAP) that the Company follows to ensure
consistent reporting of the Company’s financial condition, results of
operations, and cash flows. References to GAAP issued by the FASB in
these footnotes are to the FASB
Accounting Standards
Codification
TM
,
sometimes referred to as the Codification or ASC. The FASB finalized
the Codification effective for periods ending on or after September 15,
2009. Prior FASB standards are no longer being issued by the
FASB. For further discussion of the Codification see “FASB
Codification Discussion” in Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
Principles
of Consolidation
The
consolidated financial statements include the accounts of General DataComm
Industries, Inc. and its majority-owned subsidiary
companies. Intercompany accounts, transactions and profits have been
eliminated in consolidation.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Allowance for
Doubtful Accounts
.
The
Company estimates losses resulting from the inability of its customers to make
payments for amounts billed. The collectability of outstanding
invoices is continually assessed. Assumptions are made regarding the
customer’s ability and intent to pay, and are based on historical trends,
general economic conditions and current customer data. Should actual
experience with respect to collections differ from these assessments, there
could be adjustments to the allowance for doubtful accounts.
Inventories
The
Company values inventory at the lower of cost or market. Cost is
computed using standard cost, which approximates actual cost on a first-in,
first-out basis. Agreements with certain customers provide for return
rights. The Company is able to reasonably estimate these returns and
they are accrued for at the time of shipment. Inventory quantities on
hand are reviewed on a quarterly basis and a provision for excess and obsolete
inventory is recorded based primarily on product demand for the preceding twelve
months. Historical product demand may prove to be an inaccurate
indicator of future demand in which case the Company may increase or decrease
the provision required for excess and obsolete inventory in future
periods. Furthermore, if the Company is able to sell inventory in the
future that has been previously written down or off, such sales will result in
higher than normal gross margin.
Property,
Plant and Equipment
Property,
plant and equipment are stated at cost and are depreciated or amortized using
the straight-line method over their estimated useful lives. The cost
of internally constructed assets (test fixtures) includes the cost of materials,
internal labor and overhead costs (see Note 6).
Impairment
of Long-Lived Assets
The
Company assesses the impairment of long-lived assets whenever events or changes
in circumstances indicate that the carrying value may not be
recoverable. The Company's long-lived assets consist of real estate,
equipment and other personal property. Through September 30, 2009,
real estate represented the only long-lived asset that had, in prior years, been
written down for impairment.
Revenue
Recognition
The
Company recognizes a sale when the product is shipped or thereafter, and the
following four criteria are met: (1) persuasive evidence of an
arrangement exists; (2) title and risk of loss transfers to the customer; (3)
the selling price is fixed or determinable; and (4) collectability is reasonably
assured. A reserve for future product returns is established at the
time of the sale based on historical return rates and return policies including
stock rotation for sales to distributors that maintain a stock of the Company’s
products. Service revenue is recognized either when the service is
performed or, in the case of maintenance contracts, on a straight-line basis
over the term of the contract.
Warranty
Reserves
The
Company offers warranties of various lengths to its customers depending on the
specific product and the terms of its customer purchase
agreements. Standard warranties require the Company to repair or
replace defective product returned during the warranty period at no cost to the
customer. An estimate for warranty related costs is recorded based on
actual historical return rates and repair costs at the time of
sale. On an on-going basis, management reviews these estimates
against actual expenses and makes adjustments when necessary. While
warranty costs have historically been within expectations of the provision
established, there is no guarantee that the Company will continue to experience
the same warranty return rates or repair costs as in the past. A
significant increase in product return rates or the costs to repair our products
would have a material adverse impact on the Company’s operating
results.
Promotion
and Advertising Costs
Promotion
and advertising costs, which include internal staff costs, are charged to
selling, general and administrative expense in the period in which they are
incurred. Promotion and advertising costs amounted to $60,000 and $65,000 in
fiscal years 2009 and 2008, respectively.
Research
and Product Development
Research
and product development is expensed in the period incurred.
Income
Taxes and Deferred Tax Assets
The
Company files a consolidated federal income tax return with its
subsidiaries. In addition, the Company and/or its subsidiaries file
in various states and foreign jurisdictions.
The
Company accounts for income taxes in accordance with FASB ASC 740,
Income Taxes
. FASB
ASC 740 prescribes the use of the liability method whereby deferred tax assets
and liability account balances are determined based on differences between the
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. The Company provided a full valuation
allowance related to its deferred tax assets. In the future, if
sufficient evidence of the Company’s ability to generate sufficient future
taxable income in certain tax jurisdictions becomes apparent, the Company will
be required to reduce its valuation allowances, resulting in income tax benefits
in the Company’s consolidated statement of operations. Management
evaluates the realizability of the deferred tax assets each year.
FASB ASC 740-10 clarifies the
accounting for income taxes, by prescribing a minimum recognition threshold a
tax position is required to meet before being recognized in the financial
statements. It also provides guidance on derecognition, measurement
and classification of amounts relating to uncertain tax positions, accounting
for and disclosure of interest and penalties, accounting in interim periods,
disclosures and transition relating to the adoption of the new accounting
standard. The Company classifies interest and penalties on tax
positions as selling, general and administrative expenses. Accrued interest and
penalties included in the balance sheet at September 30, 2009 amounted to
approximately $21,000
.
Foreign
Currency
Transactions
denominated in foreign currencies are recorded on a monthly basis using the
average of the prior and current month end exchange rates. Assets and
liabilities denominated in foreign currencies are translated at the balance
sheet dates using the closing rates of exchange between those foreign currencies
and the U.S. dollar with any transaction gains or losses reported in
income. Adjustments that result from translating financial statements
of the Company’s subsidiary in France are recorded in accumulated other
comprehensive income or loss.
Earnings
(Loss) Per Share
Basic
earnings (loss) per share is computed by allocating net income (loss) available
to common stockholders to common and Class B shares based on their contractual
participation rights to share in such net income as if all the income for the
year had been distributed. Such allocation reflects that common stock
is entitled to cash dividends, if and when paid, 11.11% higher per share than
Class B stock. The income (loss) allocated to each security is
divided by the respective weighted average number of common and Class B shares
outstanding during the period. Diluted earnings per share gives
effect to all potential dilutive common shares outstanding during the
period. In computing diluted earnings per share, the average price of
the Company’s common stock for the period is used in determining the number of
shares assumed to be purchased from exercise of stock options and
warrants. Dividends applicable to preferred stock represent
accumulating dividends that are not declared or accrued.
Concentrations
of Credit Risk
Financial
instruments which potentially subject the Company to concentrations of credit
risk consist principally of cash instruments and unsold accounts
receivable.
The
Company’s business is characterized by a concentration of sales to a limited
number of key customers. Sales to the Company’s top five customers
accounted for 57% and 54% of revenues in fiscal 2009 and 2008,
respectively. Customers who accounted for 10% or more of revenues in
fiscal 2009 were AT&T Global Networks, a worldwide telecomm provider (20%)
and NEC Philips, a large integrator in Italy (19%). The Company’s
customers who accounted for 10% or more of revenue in fiscal 2008 were Thales
Communications (15%) and the City of Los Angeles (10%). These
receivables are not collateralized due to the Company’s assessment of limited
risk and favorable history of payments from such customers.
The
Company sells its products and services in the United States and Canada
primarily through a direct sales force and through a variety of resellers,
integrators, and distributors. Sales to resellers, distributors and
integrators accounted for approximately 46% and 38% of product sales in fiscal
2009 and 2008, respectively. The balance of the sales of products and services
were made through direct sales to service providers and enterprise
customers. Foreign revenues were 37% and 30% of total revenue in the
fiscal years ended September 30, 2009 and 2008, respectively.
Post-Retirement
and Post-Employment Benefits
The
Company does not offer post-retirement and post-employment benefits to its
current employees other than federally required programs which are fully funded
by such employees.
The
Company does provide health and long-term care benefits to five former long-term
executives of the Company who retired in November 2001. The Company
recorded the liability for such benefits based on actuary-provided life
expectancies, known fixed annual costs and estimated variable costs and adjusts
the liability based on actual experience. The liability is not funded
until paid. The liability for such expenses was $515,000 and $562,000
at September 30, 2009 and 2008, respectively.
Stock-Based
Compensation
The
Company uses the fair value method to measure all share-based compensation to
employees, including grants of employee stock options and other equity-based
awards. This fair value is recorded as an expense in our consolidated
statement of operations over the requisite service period, which is generally
the vesting term of the award. Total compensation expense recognized
for the fiscal years ended September 30, 2009 and 2008 was $118,000 and
$230,000, respectively. As of September 30, 2009, total unrecognized
estimated compensation expense net of forfeitures related to non-vested equity
awards granted prior to that date was $98,000 and will be amortized over a
weighted average period of 1.42 years.
The
Company values their share-based awards on the date of grant using the
Black-Scholes model. The determination of the fair value of
share-based payment awards on the date of grant using a pricing model is
affected by the Company stock price as well as assumptions regarding a number of
complex and subjective variables. These variables include, but are
not limited to, expected stock price volatility over the expected term of the
awards, actual and projected employee equity award behaviors, risk-free interest
rate and expected dividends. In the model, the Company uses the
historical volatility in its stock price for the expected volatility
assumption. The risk-free interest rate is based on the implied yield
currently available on United States Treasury zero-coupon issues with a
remaining term equal to the expected term of the awards on the grant
date. Furthermore, the Company estimates forfeitures for equity
awards granted which are not expected to vest. The prevesting
forfeiture rate is calculated by using historical equity grants forfeiture
information. If factors change and different assumptions are employed
in future periods, the compensation expense that is recorded may differ
significantly from what has been recorded in the current period.
Comprehensive
Income (Loss)
Comprehensive
income (loss) is included in the consolidated statements of stockholders’
deficit.
Accumulated
other comprehensive income (loss) is comprised solely of foreign currency
translation adjustments. There is no income tax expense or benefit
associated with such adjustments.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods presented. Actual results could differ from those
estimates. For example, the markets for the Company’s products are characterized
by intense competition, rapid technological development and frequent new product
introductions, all of which could impact the future value of the Company’s
inventory and certain other assets.
Recently
Issued Accounting Standards
In
September 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-06,
Income Taxes
, which
provided implementation guidance on the accounting for uncertainty in income
taxes and disclosure amendments for nonpublic entities. The adoption
of the implementation guidance will not have an impact on the Company’s
consolidated financial statements and disclosures.
In June
2009, the FASB issued FASB ASC 105,
Generally Accepted Accounting
Principles,
which establishes the FASB Accounting Standards Codification,
referred to above in
“Critical
Accounting Policies”,
as the sole source of authoritative generally
accepted accounting principles (“GAAP”). Pursuant to the provisions
of FASB ASC 105, the Company has updated references to GAAP in its financial
statements issued for the period ended September 30, 2009. The
adoption of FASB ASC 105 did not impact the Company’s financial position or
results of operations.
In May
2009, the FASB issued guidance related to changes to accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued, otherwise known
as “subsequent events”. In particular, these changes set forth (i)
the period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that my occur, (ii) the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date and (iii) the disclosures that an entity
should make about events or transactions that occurred after the balance sheet
date. This guidance introduces the concept of financial statements
being available to be issued. It requires the disclosure of (i) the
date through which an entity has evaluated subsequent events and (ii) the basis
for that date, that is, whether that date represents the date the financial
statements were issued or were available to be issued. This guidance
should not result in significant changes in the subsequent events that an entity
reports in its financial statements and does not apply to subsequent events or
transactions that are within the scope of other applicable generally accepted
accounting principles that provide different guidance on the accounting
treatment for subsequent events or transactions. The adoption of
these changes had no significant impact on the financial statements of the
Company.
In
December 2008, the FASB issued guidance related to employers’ disclosure about
postretirement benefit plan assets. Such disclosures should provide
users of financial statements with an understanding of (i) how investment
allocation decisions are made, (ii) major categories of plan assets, (iii) how
fair value of plan assets are measured , (iv) the effect of fair value
measurements on changes in plan assets during a period and (v) significant
concentrations of risk within plan assets. The requirements of this
new disclosure about plan assets shall be provided for fiscal years ending after
December 15, 2009.
3. Long-Term
Debt
Long-term
debt consists of (in thousands):
September
30,
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Notes
Payable to Related Parties
|
|
$
|
2,756
|
|
|
$
|
2,505
|
|
Note
Payable to Unrelated Party
|
|
|
40
|
|
|
|
14
|
|
Debentures
which matured October 1, 2008
|
|
|
19,367
|
|
|
|
19,453
|
|
Real
Estate Mortgage due July 31, 2011
|
|
|
4,500
|
|
|
|
4,500
|
|
|
|
|
26,663
|
|
|
|
26,472
|
|
Less
current portion
|
|
|
22,163
|
|
|
|
21,972
|
|
|
|
$
|
4,500
|
|
|
$
|
4,500
|
|
The
Company believes that the values of the note payable to unrelated party and real
estate mortgage approximate their respective fair values due to the recent
placement and amendment of such debt. Also, in the judgment of management, notes
payable to related parties in the amounts of $2,756,000 and $2,505,000 at
September 30, 2009 and 2008, respectively, are considered to approximate fair
value, although such financing was otherwise unavailable due to the Company’s
negative financial condition and, therefore, the Company is unable to determine
the current fair value. The estimated fair value of debentures, with
a face value totaling $19,367,000 is considered to be substantially lower than
carrying value due to the debentures being subordinated to both the real estate
and related party debt. However, due to the extremely limited market
(if any) for the debentures, the Company is unable to determine the current fair
value.
Long-term
debt in the form of the real estate mortgage in the amount of $4,500,000 matures
July 31, 2011, as amended (see Note 18 “Subsequent
Events”). Debentures in the amount of $19,367,000 matured
October 1, 2008, but are restricted from being paid until the senior debt is
paid (see discussion below). Related party debt is presently due and
payable but demand for payment has not been made. The note payable to
unrelated party matures in fiscal 2010.
Notes
Payable to Related Parties and Warrants
On
December 9, 2005 Mr. Howard S. Modlin, Chairman of the Board and Chief Executive
Officer, and Mr. John Segall, a Director, restructured existing loans and
entered into new senior secured loans with the Company in the principal amount
of $1,198,418 and $632,527, respectively. Interest accrues
at the rate of 10% per annum. In connection with the transactions,
Mr. Modlin and Mr. Segall each received seven year warrants expiring December 8,
2012 to purchase common stock at $0.575 per share covering 2,084,204 shares and
1,100,047 shares, respectively.
On
February 17, 2006, the Company borrowed $250,000 from Mr. Modlin in the form of
a demand note which bore interest at the rate of 10% per annum. On
April 20, 2006, the Corporation entered into an amendment of its loan
arrangement with Mr. Modlin whereby the $250,000 demand loan made by Mr. Modlin
on February 17, 2006 was amended and restated into a term note, 50% of which was
payable February 17, 2007 and 50% of which was payable February 17, 2008 (such
payments were deferred until July 30, 2010 in agreement with Mr.
Modlin). Mr. Modlin received a seven year warrant expiring April 19,
2013 to purchase 909,090 shares of common stock at $0.275 per share.
In the
quarters ended March 31, 2007 and December 31, 2007, Mr. Modlin made demand
loans to the Company totaling $270,000 and $125,000, respectively, and which
bore interest at the annual rate of 10%. Such loans were paid off in
the quarter ended March 31, 2008. On April 30, May 13, July 9,
September 18 and October 1, 2008, Mr. Modlin made demand loans to the
Company in the amounts of $175,000, $75,000, $110,000, $175,000 and $250,000
respectively. Such loans bear interest at the annual rate of
10%. The loan made on July 9, 2008 was repaid on July 17,
2008.
Accrued
interest on all such loans amounted to $374,926 and $111,866 at September 30,
2009 and 2008, respectively. All loans made by Mr. Modlin and Mr.
Segall are collateralized by all the assets of the Company.
Debentures
Debentures
together with accrued interest matured on October 1, 2008. The
debentures were issued to unsecured creditors in 2003 as part of the Company’s
plan of reorganization. No principal or interest is payable on the
debentures until the senior lenders’ claims are paid in full and no principal or
interest has been paid as of January 12,
2010. Interest accrues at the annual rate of 10% and totaled
$11,723,000 at September 30, 2009. (see Note 1 “Liquidity and Going
Concern”)
Real
Estate Mortgage
The real
estate mortgage entered into July 30, 2007 in the amount of $4,500,000 is
secured by the Company’s premises in Naugatuck, CT. The mortgage
required monthly payments of interest at the rate of 30-day LIBOR plus 8% with a
minimum interest of 12% (such interest was 12% at September 30,
2009). No principal payments are required until the full amount of
the mortgage matures. Effective December 31, 2009, the
Company amended the mortgage to extend the
maturity date from July 30, 2010 to July 31, 2011, to increase the interest rate
effective August 1, 2010 to LIBOR plus 9% with a minimum interest of 13% and to
charge a fee in the amount of $45,000 that is payable no later than August 1,
2010 (see Note 18 “Subsequent Events”). The mortgage
contains no financial covenants.
4. Receivable
Sales Agreement with Related Party
On
October 24, 2008, the Company’s subsidiary, General DataComm, Inc., entered into
a Receivable Sales Agreement with Howard S. Modlin, the Company’s Chief
Executive Officer, pursuant to which Mr. Modlin initially purchased receivables
with a face value of $256,000 for an aggregate purchase price of $250,000
representing a 2.5% discount. Thereafter, Mr. Modlin made additional
purchases through September 30, 2009 with a face value of $7,787,000 for an
aggregate purchase price of $7,596,000 under this agreement. For
accounting purposes, the discount is recorded as an expense at the time of
purchase. Such expense amounted to $ 190,000 in the year ended
September 30, 2009.
On April
15, 2009, such agreement was amended to include purchases of accounts receivable
to be invoiced pursuant to customer purchase orders. The liability
for rights to such future accounts receivable totaled $888,000 at September 30,
2009 and is included in other current liabilities (see Note 13).
5. Inventories
Inventories
consist of (in thousands):
September 30,
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
405
|
|
|
$
|
160
|
|
Work-in-process
|
|
|
1,535
|
|
|
|
1,286
|
|
Finished
goods
|
|
|
495
|
|
|
|
1,727
|
|
|
|
$
|
2,435
|
|
|
$
|
3,173
|
|
Inventories
are stated at the lower of cost or market using the first-in-first out
method. Reserves in the amount of $2,879,000 and $3,033,000 were
recorded at September 30, 2009 and 2008, respectively, for excess and obsolete
inventories.
6. Property,
Plant and Equipment
Property,
plant and equipment consist of (in thousands):
September 30,
|
|
2009
|
|
|
2008
|
|
|
Estimated Useful Life
|
|
Land
|
|
$
|
1,000
|
|
|
$
|
1,000
|
|
|
—
|
|
Buildings
and improvements
|
|
|
7,115
|
|
|
|
7,115
|
|
|
10
to 30 years
|
|
Test
equipment, fixtures and field spares
|
|
|
3,383
|
|
|
|
3,595
|
|
|
3
to 10 years
|
|
Other
equipment
|
|
|
3,764
|
|
|
|
4,625
|
|
|
2
to 10 years
|
|
|
|
|
15,262
|
|
|
|
16,335
|
|
|
|
|
|
Less:
accumulated depreciation
|
|
|
11,953
|
|
|
|
12,697
|
|
|
|
|
|
|
|
$
|
3,309
|
|
|
$
|
3,638
|
|
|
|
|
|
Depreciation
expense amounted to $364,000 and $299,000 in fiscal 2009 and 2008,
respectively.
The
Company’s property in Naugatuck, Connecticut, which is the location of the
Company’s operations, has a net book value of $3,219,000 and $3,399,000 at
September 30, 2009 and 2008, respectively. Although the Company has
been actively trying to sell the building since 2001, due to its inability to do
so, such building is not reflected as an asset held for sale in the accompanying
balance sheets. In addition such property is collateral for the
indebtedness under the Company’s mortgage note, which has a first lien, as well
as notes payable to related parties collateralized by a subordinate mortgage and
subordinated rights of debentures to any remaining proceeds.
7. Income
Taxes
Income
(loss) before income taxes in the years ended September 30, 2009 and 2008
consists primarily of domestic income (loss) generated in the United
States. The income tax provision for the fiscal year ended September
30, 2009 reflects a benefit of $46,000 and includes $37,000 related to a refund
of prior years’ general business credit under provisions of the U.S.
Housing and Economic Recovery Act of 2008, and a benefit of $21,000 resulting
from a reduction in reserves for state taxes due to expiration of time in which
to make claims by taxing authorities, offset by $12,000 in current state tax
liabilities. The income tax provision for the fiscal year ended
September 30, 2008 reflects a benefit in the amount of $169,000 and includes a
reduction of $176,000 of possible tax liabilities deemed no longer required due
to expiration of time in which to make claims by taxing authorities, offset by
$7,000 in current state tax liabilities.
The
following reconciles the U.S. statutory income tax rate to the Company’s
effective rate:
Year
ended September 30,
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Federal
statutory rate
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
Federal
tax refund
|
|
|
(.7
|
)
|
|
|
-
|
|
Reduction
of accruals for prior years’ taxes
|
|
|
(.3
|
)
|
|
|
(5.5
|
)
|
Change
in valuation allowance
|
|
|
34.0
|
|
|
|
34.0
|
|
State
income tax effects
|
|
|
.2
|
|
|
|
.2
|
|
Effective
income tax rate
|
|
|
(0.8
|
)%
|
|
|
(5.3
|
)%
|
For
regular income tax reporting purposes at September 30, 2009, domestic federal
tax credit and net operating loss carryforwards amounted to approximately $11.9
million and $214.4 million, respectively. Domestic federal tax credit
and net operating loss carryforwards expire in various amounts between fiscal
2010 and 2025. Domestic state loss carryforwards of approximately $49.4 million
expire in various amounts between fiscal 2010 and 2029, but most expire by
2023. Utilization of the net operating loss carryforwards may be
subject to limitation due to the changes in ownership provisions under section
382 of the Internal Revenue Code and similar state provisions.
The tax
effects of the significant temporary differences and carryforwards comprising
the deferred tax assets and liabilities at September 30, 2009 and 2008 were as
follows (in thousands):
|
|
2009
|
|
|
2008
|
|
Deferred
Tax Assets
|
|
|
|
|
|
|
Bad
debt reserve
|
|
$
|
90
|
|
|
$
|
90
|
|
Inventory
reserve
|
|
|
7,456
|
|
|
|
7,315
|
|
Other
accruals
|
|
|
447
|
|
|
|
490
|
|
Loss
carryforward
|
|
|
76,838
|
|
|
|
77,893
|
|
Tax
credits
|
|
|
11,832
|
|
|
|
11,872
|
|
|
|
|
96,663
|
|
|
|
97,660
|
|
Valuation
allowance
|
|
|
(96,663
|
)
|
|
|
(97,660
|
)
|
Net
deferred tax assets
|
|
$
|
0
|
|
|
$
|
0
|
|
The
deferred tax asset related to the inventory reserve includes inventory written
off for book purposes which is not yet deductible for tax reporting
purposes.
FASB ASC
740 prescribes the use of the liability method whereby deferred tax assets and
liability account balances are determined based on differences between the
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. The Company provided a full valuation
allowance related to its deferred tax assets. In the future, if
sufficient evidence of the Company’s ability to generate sufficient future
taxable income in certain tax jurisdictions becomes apparent, the Company will
be required to reduce its valuation allowances, resulting
in income tax benefits in
the Company’s consolidated statement of operations. Management
evaluates the realizability of the deferred tax assets each year.
FASB ASC
740-10 clarifies the accounting for income taxes, by prescribing a minimum
recognition threshold a tax position is required to meet before being recognized
in the financial statements. It also provides guidance on
derecognition, measurement and classification of amounts relating to uncertain
tax positions, accounting for and disclosure of interest and penalties,
accounting in interim periods, disclosures and transition relating to the
adoption of the new accounting standard. The Company classifies
interest and penalties on tax positions as selling, general and administrative
expenses. Accrued interest and penalties included in the balance sheet at
September 30, 2009 amounted to approximately $21,000.
8. Capital
Stock
Common Stock and Class B
Stock
In
addition to regular common stock, the Company’s capital structure includes Class
B stock which, under certain circumstances, has greater voting power in the
election of directors. However, common stock is entitled to cash
dividends, if and when paid, 11.11% higher per share than Class B
stock. The Company has never declared or paid cash dividends on its
common stock. So long as there are arrearages in payment of dividends
on the Company’s 9% Preferred Stock, the Company is prohibited from paying cash
dividends on its common stock and Class B stock. Class B stock has
limited transferability and is convertible into common stock at any time on a
share-for-share basis. There were 634,615 shares of Class B stock
outstanding at September 30, 2009 and 2008.
9% Preferred
Stock
At
September 30, 2009 and 2008, there were 781,996 shares of the Company’s 9%
Cumulative Convertible Exchangeable Preferred Stock (“9% Preferred Stock”)
outstanding. The 9% Preferred Stock accrues dividends at a rate of 9%
per annum, cumulative from the date of issuance and payable quarterly in
arrears. Dividends were paid through June 30, 2000; dividends in arrears, which
are not accrued for financial reporting purposes since they have not been
declared by the Company, amounted to $16,275,000 at September 30, 2009 ($18.56
per share) and are included in the liquidation value disclosed in the
accompanying fiscal 2009 balance sheet. Such arrearages entitle the
holders of the 9% Preferred Stock to elect two directors until all arrearages
are paid, but no such designation has been made or requested. The 9%
Preferred Stock can be converted into common stock at $136.50 per share, or the
equivalent of .18315 shares of common stock for each share of 9% Preferred
Stock.
9.
Segment and Geographical Information
For the
years ended September 30, 2009 and 2008, the Company operated in one reportable
segment.
Consolidated
revenue and long-lived asset information by geographic area is as follows (in
thousands):
|
|
Revenue
|
|
|
Long-Lived Assets
|
|
Year
ended September 30,
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
5,460
|
|
|
$
|
7,805
|
|
|
$
|
3,309
|
|
|
$
|
3,623
|
|
Foreign
|
|
|
3,240
|
|
|
|
3,383
|
|
|
|
-
|
|
|
|
15
|
|
Total
|
|
$
|
8,700
|
|
|
$
|
11,188
|
|
|
$
|
3,309
|
|
|
$
|
3,638
|
|
Foreign
revenue is determined based on the country in which the revenue originated
(where the customer placing the order is domiciled).
Customers
accounting for more than 10% of the Company’s revenues in fiscal 2009 were
AT&T Global Network at 20% and NEC Philips (Italy) at 19% and in fiscal 2008
such customers were Thales Communications (France) at 15% and City of Los
Angeles at 10%.
10. Employee
Incentive Plans
Stock
Awards, Grants and Options
The
Company has adopted a 2003 Stock and Bonus Plan (“2003 Plan”) reserving 459,268
shares of Class B stock and 459,268 shares of common stock and a 2005 Stock and
Bonus Plan (“2005 Plan”) reserving 2,400,000 shares of common
stock. No shares of Class B stock are presently authorized under the
2005 Plan. Officers and key employees may be granted non-incentive
stock options at an exercise price equal to, greater than or less than the
market price on the date of grant. While individual options can be
issued under various provisions, most options, once granted, generally vest in
increments of 20% per year over a five-year period and expire within ten years.
At September 30, 2009 there were 567,326 options available for future issuance
under the plans.
On
October 11, 2007, the Stock Option Committee of the Board of Directors granted
stock options pursuant to the Company’s 2005 Plan to purchase 312,900 shares of
common stock at the quoted market price of $.25 per share, including grants of
30,000 shares to each of Aletta Richards and John L. Segall, Directors, William
G. Henry, Vice President, Finance and Administration and Principal Financial
Officer and George Gray, Vice President, Operations and Chief Technology
Officer, and an aggregate of 192,900 of such options to all of its employees
other than its officers and directors. The Committee also granted to
Howard S. Modlin, Chairman and Chief Executive Officer, a stock option with
terms similar to the options granted under the 2005 Plan to purchase 551,121
shares at $.275 a share. All such options vest in increments of 20%
per year over a five year period and expire ten years after grant.
A summary
of stock options outstanding under the Company’s stock plans as of September 30,
2009 and changes during the twelve months ended September 30, 2008 and 2009 is
presented below:
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted Average
Remaining Contractual
Term (Yrs)
|
|
|
Aggregate
Intrinsic
Value
|
|
Options
outstanding, September 30, 2007
|
|
|
2,635,807
|
|
|
$
|
0.77
|
|
|
|
|
|
|
|
Options
granted
|
|
|
864,021
|
|
|
|
0.27
|
|
|
|
|
|
|
|
Options
exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
Options
cancelled or expired
|
|
|
(129,157
|
)
|
|
|
2.24
|
|
|
|
|
|
|
|
Options
outstanding, September 30, 2008
|
|
|
3,370,671
|
|
|
|
0.57
|
|
|
|
7.58
|
|
|
$
|
0
|
|
Options
granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Options
exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Options
cancelled or expired
|
|
|
(141,518
|
)
|
|
|
2.34
|
|
|
|
|
|
|
|
|
|
Options
outstanding, September 30, 2009
|
|
|
3,229,153
|
|
|
|
0.52
|
|
|
|
6.61
|
|
|
|
0
|
|
Vested
or expected to vest at September 30, 2009
|
|
|
2,695,046
|
|
|
|
0.46
|
|
|
|
6.55
|
|
|
|
0
|
|
Exercisable
at September 30, 2009
|
|
|
1,656,223
|
|
|
|
.70
|
|
|
|
6.14
|
|
|
|
0
|
|
As of
September 30, 2009, there was $98,000 of total unrecognized compensation cost
related to nonvested options which is expected to be recognized over a
weighted-average period of 1.42 years.
The
weighted-average grant-date fair value of options granted during the twelve
months ended September 30, 2008 was $0.23 per share, which was estimated using
the Black Scholes model and the following weighted average
assumptions:
Risk-free
interest rate (%)
|
|
|
3.76
|
%
|
Volatility
(%)
|
|
|
133
|
%
|
Expected
life (in years)
|
|
|
6.50
|
|
Dividend
yield rate
|
|
Nil
|
|
Expected
volatility is based on historical volatility in the Company’s stock price over
the expected life of the options. The risk-free interest rate is
based on the annual yield on the measurement date of a zero coupon U.S. Treasury
Bond, the maturity of which equals the options’ expected life. The
weighted average expected life of 6.50 years is the average of the contractual
term of the options and the weighted average vesting period for all option
tranches. The dividend yield assumption is based on the Company’s
intent not to issue a dividend.
Employee
Retirement Savings and Deferred Profit Sharing Plan
Under the
retirement savings provisions of the Company’s retirement plan established under
Section 401(k) of the Internal Revenue Code, employees are generally eligible to
contribute to the plan after three months of continuous service in amounts
determined by the plan. The Company does not make matching
contributions and, therefore, no amounts have been charged to
expense.
The
deferred profit sharing portion of the plan provides that the Company may make
contributions to the plan out of profits at the discretion of the
Company. There were no such contributions in the two fiscal years
ended September 30, 2009.
11. Earnings
(Loss) Per Share
The
following table sets forth the computation of basic and diluted earnings (loss)
applicable to common and Class B stock for the years ended September 30, 2009
and 2008 (in thousands, except shares and per share data):
Year Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
Net
loss
|
|
$
|
(5,568
|
)
|
|
$
|
(3,035
|
)
|
Dividends
applicable to preferred stock
|
|
|
(1,760
|
)
|
|
|
(1,760
|
)
|
Net
loss applicable to common and Class B stock
|
|
$
|
(7,328
|
)
|
|
$
|
(4,795
|
)
|
Net
loss applicable to common stock – basic and diluted
|
|
$
|
(6,200
|
)
|
|
$
|
(4,052
|
)
|
Net
loss applicable to Class B stock – basic and diluted
|
|
$
|
(1,128
|
)
|
|
$
|
(743
|
)
|
|
|
Year Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
Common Stock
|
|
|
Class B Stock
|
|
Numerator
for basic and diluted earnings per share - net loss
|
|
$
|
(6,
200
|
)
|
|
$
|
(4,052
|
)
|
|
$
|
(1,128
|
)
|
|
$
|
(743
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic and diluted earnings per share - weighted average outstanding
shares
|
|
|
3,487,473
|
|
|
|
3,483,071
|
|
|
|
634,615
|
|
|
|
639,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
$
|
(1.78
|
)
|
|
$
|
(1.16
|
)
|
|
$
|
(1.78
|
)
|
|
$
|
(1.16
|
)
|
In fiscal
2009 and 2008, no effect has been given to certain outstanding options and
warrants, convertible securities and contingently issuable shares in computing
diluted income (loss) per common share as their effect would be
antidilutive. Such share amounts which could potentially dilute basic
earnings per share are as follows:
|
|
No. of Shares
|
|
|
|
2009
|
|
|
2008
|
|
Stock
warrants
|
|
|
4,093,341
|
|
|
|
4,093,341
|
|
Stock
options
|
|
|
3,229,153
|
|
|
|
3,370,671
|
|
Convertible
preferred stock
|
|
|
143,223
|
|
|
|
143,223
|
|
Total
|
|
|
7,465,717
|
|
|
|
7,607,235
|
|
12. Related
Party Transactions
Mr.
Howard Modlin, Secretary and a Director of the Company since 1969 and Chairman
of the Board of Directors of the Company since November 2001 and currently
Chairman, President and Chief Executive Officer, is also President of the law
firm of Weisman Celler Spett & Modlin, P.C. (“WCSM”) to whom the Company was
indebted for legal services of $2,179,000 for work performed prior to the
Company’s bankruptcy filing in November 2001 and in settlement for which the
Company issued subordinated debentures. The bankruptcy court also
approved $294,000 for work performed by WCSM while the Company operated in
bankruptcy (prior to September 15, 2003). Furthermore, the Company
was indebted to Mr. Modlin for fees for Company director meetings for which he
received subordinated debentures in the total amount of
$16,400. Thereafter, WCSM agreed to work on a specific litigation
matter on a contingency basis. WCSM has outstanding amounts owed
totaling $1,575,000 for work performed for the Company between September 15,
2003 and September 30, 2009.
See Note
3 regarding loans made to the Company by Messrs. Howard Modlin and John L.
Segall, and Note 4 regarding receivable and other purchases made by Mr.
Modlin.
13.
Other Current Liabilities and Other Long-Term Liabilities
Other
current liabilities are comprised of the following (in thousands):
September 30,
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Liability
for accounts receivable to be invoiced – related party
|
|
$
|
888
|
|
|
$
|
-
|
|
Liabilities
for income tax obligations
|
|
|
80
|
|
|
|
96
|
|
Accrued
professional fees (unbilled)
|
|
|
794
|
|
|
|
566
|
|
Accrued
post retirement benefits
|
|
|
89
|
|
|
|
106
|
|
Accrued
property taxes
|
|
|
154
|
|
|
|
254
|
|
Deferred
income
|
|
|
247
|
|
|
|
642
|
|
Priority
tax claims (short-term portion)
|
|
|
412
|
|
|
|
463
|
|
Other
|
|
|
809
|
|
|
|
530
|
|
|
|
$
|
3,473
|
|
|
$
|
2,657
|
|
Other
long-term liabilities at September 2009 and 2008 in the amounts of $469,000 and
$498,000, respectively, consist primarily of the long-term portion of post
retirement benefits liabilities.
14.
Gain on Sale of Patents
On
February 5, 2008, the Company completed the sale of selected patents and patent
applications to an unrelated party for proceeds of $4,000,000. The patents
and patent applications sold relate to the Company’s product lines, and the
Company retains a non-exclusive, royalty-free license under the patents for all
its product lines.
As a
result of the sale, the Company recorded a gain in the amount of
$3,891,000. The Company used the funds for general corporate purposes,
including payment of debt and interest and for working capital.
15.
Restructuring of European Operations
In July
2009, the Company reorganized its European operations and transferred
responsibility for its European sales activities from its Paris location to its
headquarters in Connecticut. Such action resulted in the termination of
the two remaining employees of its French subsidiary and the planned closure of
the Paris office. Severance and other dismissal obligations, remaining
lease obligations and other costs related to the closure of the office
aggregating approximately $375,000, were recorded in selling, general and
administrative expense in the accompanying financial statements for the year
ended September 30, 2009.
16.
Operating Lease
At
September 30, 2009 the Company had a non-cancelable lease for a sales office in
France with annual rent of 47,100 Euros (approximately $68,000 U.S.) which
expires November 30, 2010.
Aggregate remaining
rental under this lease at September 30, 2009 amounts to 54,908 Euros
(approximately $80,000 U.S.). Such amount is fully accrued in the
Company’s financial statements at September 30, 2009 due to the reorganization
of the Company’s European operations in July 2009 (see Note 15).
Net
rental expense for fiscal 2009 (excluding restructuring charges) and 2008 was
approximately $51,000 and $77,000, respectively
17.
Contingencies
Litigation
The
Company received an adverse ruling from a France court dated November 1, 2009
regarding compensation owed to a former employee, in the amount of 151,603 Euros
(approximately $225,000 U.S.). The Company has sufficient reserves
recorded at September 30, 2009 to absorb this expense should such payment become
necessary. However the Company believes that the claims are without merit
and has entered an appeal in this case.
18.
Subsequent Events
Management
has evaluated subsequent events through January 12, 2010, the day immediately
prior to the date the financial statements were issued in this Form 10-K, and
has determined the following subsequent events to be reported:
|
·
|
Effective
December31, 2009 the Company amended the terms of its real estate
mortgage to extend the maturity date from July 31, 2010 to July 31,
2011. In consideration for the extension, the mortgagee will charge
a fee of $45,000 on July 31, 2010 and the rate of interest will increase
effective August 1, 2010 by 1.0% to 30-day LIBOR plus 9% , an increase
from the previous 30-day LIBOR plus 8%, and the minimum interest will
increase from 12% to 13%.
|
|
·
|
Pursuant
to a receivable sales agreement with a related party (see Note 4),
subsequent to September 30, 2009 and through January 12, 2010 additional
receivable purchases of $2,721,000 were made for an aggregate purchase
price of $2,653,000.
|
|
·
|
An
initial adverse ruling from a court in France was received dated November
1, 2009. See Note 17 for further
discussion.
|
ITEM
9.
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL
DISCLOSURE
|
The
Company is in discussions with an audit firm to perform the audit of its
financial statements for the year ended September 30, 2009, to replace Eisner
LLP who resigned as the Company’s independent registered public accounting firm
on January 5, 2009. The Company has limited financial resources and is seeking
to obtain audit and related services at a lower annual cost. As a
result of the Company’s limited financial resources to pay audit fees, the
accompanying financial statements included in Item 8 in this Form 10-K are
unaudited. The Company intends to file audited financial statements by
amendment when available.
ITEM
9A(T).
|
CONTROLS
AND PROCEDURES
|
The
registrant carried out an evaluation, under the supervision and with the
participation of the registrant’s management, including the registrant’s Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
registrant’s disclosure controls and procedures, as defined in Rules 13a-15(e)
or 15d-15(e) of the Securities Exchange Act of 1934. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the registrant’s disclosure controls and procedures as of
September 30, 2009 were effective to ensure that information required to be
disclosed by the registrant in reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission’s
rules and forms.
Management’s Annual Report on
Internal Control over Financial Reporting.
The Company’s management
is responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Rule 13a-15(f) or 15d-15(f) under the
Securities Exchange Act). Under supervision and with the participation
of management, including the principal executive officer and chief
financial officer, an evaluation was conducted of the effectiveness
of the Company’s internal control over financial reporting based on the
framework in “Internal Control over Financial Reporting – Guidance for Smaller
Public Companies” issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
The
Company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the preparation and fair presentation of
financial statements for external purposes in accordance with generally accepted
accounting principles. Internal control over financial reporting includes
those policies and procedures that (i)pertain to the maintenance of records that
in reasonable detail accurately and fairly reflect the transactions and
dispositions of our assets: (ii)provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures are being made only in accordance with authorizations of management
and directors; and (iii)provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of our assets
that could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Based on
the Company’s evaluation under the framework in “Internal Controls over
Financial Reporting - Guidance for Smaller Public Companies”, management
concluded that the Company’s internal control over financial reporting was
effective as of September 30, 2009.
This
annual report does not include an attestation report of a registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by a registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit the Company to provide only management’s report in this
annual report.
There
were no changes in the registrant’s internal control over financial reporting
that occurred during the quarter ended September 30, 2009 that have materially
affected, or are reasonably likely to materially affect, the registrant’s
internal control over financial reporting.
ITEM
9B. OTHER INFORMATION
The
following report on Form 8-K was filed during the last quarter of the period
covered by this report:
None
PART
III
ITEM
10.
|
DIRECTORS,
EXECUTIVE OFFICERS, AND CORPORATE
GOVERNANCE
|
Name
|
|
Position
|
|
Age
|
|
|
|
|
|
Howard
S. Modlin
|
|
Chairman
of the Board of Directors,
|
|
78
|
|
|
Chief
Executive Officer, President and Secretary
|
|
|
|
|
|
|
|
William
G. Henry
|
|
Vice
President, Finance and Administration and
|
|
60
|
|
|
Chief
Financial Officer
|
|
|
|
|
|
|
|
George
M. Gray
|
|
Vice
President, Operations and
|
|
59
|
|
|
Chief
Technical Officer
|
|
|
|
|
|
|
|
John
L. Segall
|
|
Director
|
|
83
|
|
|
|
|
|
Aletta
P. Richards
|
|
Director
|
|
57
|
Mr.
Howard S. Modlin, Chairman of the Board and Chief Executive Officer was elected
to such position in November 2001 following the death of Charles P. Johnson, the
Company’s founder. Mr. Modlin was also elected President in April 2003.
Mr. Modlin is an attorney and President of the firm of Weisman Celler Spett
& Modlin, P.C., and has been Secretary, a Director and counsel to the
Company since its formation.
Mr.
William G. Henry, Vice President, Finance and Administration and Chief Financial
Officer, joined the Company as Corporate Controller in January 1984, was
appointed an officer of the Company in June 1989, was elected Vice President in
February 1996, was promoted to Vice President, Finance and Chief Financial
Officer in February 1999 and to his present positions in April
2003.
Mr.
George M. Gray, Vice President, Operations and Chief Technical Officer, has held
positions of major responsibility within the Company since September 18, 2000
and has served in executive capacities since September 15, 2003.
Mr. John
L. Segall has been a Director of the Company since 1994. He is a
consultant, former Vice Chairman of GTE from 1991 to 1994 and former Vice
Chairman of Contel Corp. from 1989 to 1994.
Ms.
Aletta P. Richards has been a Director of the Company since September 15, 2003
and is the director designee on behalf of the Trustee under the Indenture
governing the Company’s debentures. During the past five years she has
been Corporate Credit Manager of Sanmina Corporation.
AUDIT
COMMITTEE
The Audit Committee is comprised
of one director who is not an officer or employee of the Company. The
Audit Committee had four meetings during the 2009 fiscal year to review and
approve the fiscal 2009 interim unaudited financial statements and fiscal
2008 annual financial statements.
AUDIT COMMITTEE FINANCIAL
EXPERT
The
Company’s
Board
of Directors does not have an “audit committee financial expert”. Mr. Lee
Paschall was previously an audit committee financial expert and an independent
director, as that term is used in Item 7 (d)(3)(iv) of Schedule 14A under the
Securities Exchange Act of 1934. Mr. Paschall died on December 17, 2006
and has not been replaced.
SECTION
16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Corporation’s executive officers
and directors are required under Section 16(a) of the Securities Exchange Act of
1934 to file reports of ownership and changes in ownership with the Securities
and Exchange Commission. Copies of those reports must also be furnished to
the Corporation.
Based solely on a review of the copies
of reports furnished to the Corporation and discussions with the Corporation’s
executive officers and directors, the Corporation believes that during the
preceding year, all filing requirements applicable to executive officers and
directors were met.
CODE
OF CONDUCT AND ETHICS
We have adopted a Code of Conduct and
Ethics (“Code”) that applies to all of the Company’s employees. The Code
is located on the Company’s website (www.gdc.com). Any amendments or
waivers to the Code will be promptly disclosed on our website as required by
applicable laws, rules and regulations of the Securities and Exchange
Commission.
ITEM
11.
EXECUTIVE
COMPENSATION
Reference
is made to Item 1A of this Report on Form 10-K to the discussion of Risk
Factors, relating to the ability of certain persons or groups to elect designees
to the Board of Directors which could result in a change in
control.
The following Summary Compensation
Table sets forth the compensation paid or awarded to the named executive
officers of the registrant for the fiscal years ended September 30, 2009, 2008
and 2007:
SUMMARY
COMPENSATION TABLE
|
|
Annual
Compensation
|
|
|
Long
Term Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards
|
|
|
Payouts
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Restricted
|
|
|
Underlying
|
|
|
|
|
|
All
Other-
|
|
Name
and
|
|
|
|
|
|
|
|
|
|
Compens-
|
|
|
Stock
|
|
|
Optional
|
|
|
LTIP
|
|
|
Compen-
|
|
Principal
Position
|
|
Year
|
|
Salary
|
|
|
Bonus
|
|
|
ation
|
|
|
Awards
|
|
|
SARS
|
|
|
Payouts
|
|
|
sation
|
|
|
|
($)
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
(#)
|
|
|
($)
|
|
|
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Howard
S. Modlin
(1)
|
|
2009
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Chairman
of the
|
|
2008
|
|
$
|
46,030
|
|
|
|
-
|
|
|
$
|
1,385
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Board
of Directors and
|
|
2007
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Chief
Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William
G. Henry
(2)
|
|
2009
|
|
$
|
139,131
|
|
|
|
-
|
|
|
$
|
2,020
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Vice
President,
|
|
2008
|
|
$
|
165,377
|
|
|
|
-
|
|
|
$
|
8,190
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Finance
and
|
|
2007
|
|
$
|
151,592
|
|
|
|
-
|
|
|
$
|
8,190
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Administration
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief
Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
George
M. Gray
(2)
|
|
2009
|
|
$
|
128,157
|
|
|
|
-
|
|
|
$
|
470
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Vice
President,
|
|
2008
|
|
$
|
153,843
|
|
|
|
-
|
|
|
$
|
7,545
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Operations
and Chief
|
|
2007
|
|
$
|
139,630
|
|
|
|
-
|
|
|
$
|
7,545
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Technology
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Except
for a four week period in 2008, Mr. Modlin has served without salary or
bonus since he assumed such positions in November 2001 following the death
of the Company’s founder and Chairman, Charles P. Johnson. The Company is
paying the annual premium on a $5,000,000 life insurance policy which the
Company owns, on Mr. Modlin's life at an approximate annual cost of
$45,400. Such amounts are not included in All Other Compensation as
the Company is the owner of said
policy.
|
(2)
|
Mr.
Henry became Vice President, Finance and Administration in April 2003. He
was elected Vice President, Finance and Chief Financial Officer in fiscal
1999. Mr. Gray became an executive officer on September 15,
2003.
|
(3)
|
Other
Annual Compensation is comprised of the
following:
|
|
|
|
Car Allowance
|
|
|
Term Life Insurance
|
|
|
Commissions
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Howard
S. Modlin
|
2009
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
2008
|
|
|
1,385
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,385
|
|
|
2007
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
William
G. Henry
|
2009
|
|
|
-
|
|
|
|
2,020
|
|
|
|
-
|
|
|
|
2,020
|
|
|
2008
|
|
|
6,900
|
|
|
|
1,290
|
|
|
|
-
|
|
|
|
8,190
|
|
|
2007
|
|
|
6,900
|
|
|
|
1,290
|
|
|
|
-
|
|
|
|
8,190
|
|
George
M. Gray
|
2009
|
|
|
-
|
|
|
|
470
|
|
|
|
-
|
|
|
|
470
|
|
|
2008
|
|
|
6,900
|
|
|
|
645
|
|
|
|
-
|
|
|
|
7,545
|
|
|
2007
|
|
|
6,900
|
|
|
|
645
|
|
|
|
-
|
|
|
|
7,545
|
|
Reference
is made to Notes 3, 4 and 12 in the Notes to Consolidated Financial
Statements in Item 8 of this Report on Form 10-K for description of related
party transactions and loans and receivables purchases made by Messrs.
Modlin and Segall to the Company:
The
following table sets forth certain summary information covering each exercise of
stock options to purchase the Company’s common stock during the fiscal year
ended September 30, 2009 by each of the named executive officers and the
value of unexercised options as of September 30, 2009:
AGGREGATED
OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL
YEAR-END OPTION/SAR VALUES
|
|
|
|
|
|
|
|
Number of Securities
Underlying Unexercised
Options at Fiscal Year End (#)
|
|
|
Value of Unexercised
In-The–Money Options at
Fiscal Year-End ($)
|
|
Name
|
|
Shares
Acquired
on
Exercise
(#)
|
|
|
Value
Realized
($)
|
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Howard
S. Modlin, CEO
|
|
|
0
|
|
|
|
0
|
|
|
|
1,102,844
|
|
|
|
1,102,240
|
|
|
|
0
|
|
|
|
0
|
|
William
G. Henry
|
|
|
0
|
|
|
|
0
|
|
|
|
72,056
|
|
|
|
60,000
|
|
|
|
0
|
|
|
|
0
|
|
George
M. Gray
|
|
|
0
|
|
|
|
0
|
|
|
|
73,000
|
|
|
|
60,000
|
|
|
|
0
|
|
|
|
0
|
|
The
following table sets forth that there were no awards made to each named
executive officer during the fiscal year ended September 30, 2009 under any
Long-Term Incentive Plan (“LTIP”):
LONG-TERM
INCENTIVE PLANS – AWARDS IN LAST FISCAL YEAR
|
|
|
|
Preference
or Other
|
|
|
Estimated
Future Payouts Under
|
|
|
|
Number
of
|
|
Period
Until
|
|
|
Non-Stock
Price-Based Plans
|
|
Name
|
|
Shares #
|
|
Maturities or Payment
|
|
|
Threshold
|
|
|
Target
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Howard
S. Modlin, CEO
|
|
None
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
William
G. Henry
|
|
None
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
George
M. Gray
|
|
None
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Director
Compensation
No fees
were paid to Directors for attendance at Board and Committee Meetings for the
fiscal year ended September 30, 2009.
Employment
Contracts
The
Company has no employment contracts with any of its executives.
Stock
Option Plans
Under the
terms of the Company's Stock Option Plans in effect prior to 2003, officers and
key employees under those plans selected by the Chairman of the Board or the
Stock Option Committee, as the case may be, may be granted incentive stock
options at an exercise price equal to or greater than the fair market value per
share on the date of grant and non-incentive stock options at an exercise price
equal to, greater than or less than the fair market value per share on the date
of grant. While individual options can be issued under various provisions,
options cannot be exercised during the first year, generally vest in increments
of 25% per year over a four-year period and expire within ten years for
outstanding options granted under the older plans. The Chairman or the
Stock Option Committee, as the case may be, determines the number of stock
options to be granted to any person, subject to the limitations on incentive
stock options in Section 422A of the Internal Revenue Code of l986, as amended
("Code").
On
September 15, 2003 the Company adopted the 2003 Stock and Bonus Plan
(“2003 Plan”) reserving 459,268 shares of Class B stock and 459,268 shares of
common stock for grant by the Stock Option Committee of the Board of
Directors. The 2003 Plan provides for outright stock grants, conditional
stock grants and non-incentive stock options.
On
January 26, 2005, the Board of Directors adopted the 2005 Stock and Bonus Plan
(“2005 Plan”) covering 1,200,000 shares of common stock, and the Stock Option
Committee authorized certain options pursuant to the 2005 Plan. The
provisions of the 2005 Plan are similar to the 2003 Plan except that no shares
of Class B stock are authorized under the 2005 Plan.
On
October 11, 2007, the Stock Option Committee of the Board of Directors granted
stock options pursuant to the Corporation’s 2005 Plan to purchase 312,900 shares
of common stock at the quoted market price of $.25 per share, including grants
of 30,000 shares to each of Aletta Richards and John L. Segall, Directors,
William G. Henry, Vice President, Finance and Administration and Principal
Financial Officer and George Gray, Vice President, Operations and Chief
Technology Officer, and an aggregate of 192,900 of such options to all of its
employees other than its officers and directors. The committee also
granted to Howard S. Modlin, Chairman and Chief Executive Officer, a stock
option with terms similar to options granted under the Plan to purchase 551,121
shares at $.275 a share. All such options vest in increments of 20% a year
over a five year period and expire ten years after grant.
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
The
following table sets forth information as of November 30, 2009 with respect to
the beneficial ownership of the Corporation’s Class B stock and common stock by
all persons known by the Corporation to own more than 5% of the Corporation’s
outstanding Class B stock or common stock who are deemed to be such beneficial
owners of the Corporation's Class B stock or common stock under Rule
13d-3. The Percent of Class and Percent of All Classes presented are based
upon shares outstanding on November 30, 2009 and all outstanding options and
warrants are at exercise prices that are higher than the market price for common
stock on November 30, 2009. Class B stock is convertible into common stock
at any time on a share-for-share basis.
Title of Class
|
|
Name and Address of
Beneficial Owner
|
|
Amount and
Nature
of Beneficial
Ownership
|
|
|
Percent of Class
|
|
|
Percent of All
Classes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
B Stock,
|
|
Howard
S. Modlin
|
|
|
459,943
|
(1)
|
|
|
72.5
|
%
|
|
|
5.1
|
%
|
$.01
par value
|
|
General
DataComm
|
|
|
|
|
|
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|
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|
|
|
|
|
Naugatuck,
CT 06770
|
|
|
|
|
|
|
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock,
|
|
Howard
S. Modlin
|
|
|
4,545,487
|
(1)
|
|
|
56.6
|
%
|
|
|
57.8
|
%
|
$.01
par value
|
|
General
DataComm
|
|
|
|
|
|
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|
|
|
|
|
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Naugatuck,
CT 06770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock,
|
|
John
L. Segall
|
|
|
1,209,147
|
(2)
|
|
|
25.9
|
%
|
|
|
22.8
|
%
|
$.01
par value
|
|
General
DataComm
|
|
|
|
|
|
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Naugatuck,
CT 06770
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The
amount of common stock beneficially owned by Howard S. Modlin includes the
following: 9,053 shares owned by Mr. Modlin’s law firm pursuant to
Rule 13d-3, 909,090 shares deemed owned on exercise of a seven year
warrant at $.275 a share issued April 20, 2006, 2,084,204 shares deemed
owned on exercise of a seven year warrant at $.575 a share issued December
9, 2005, 551,121 shares at $.61 per share deemed owned pursuant to an
option granted January 26, 2005, 440,897 shares at $.50 a share
under an option granted November 22, 2005, 330,673 shares under an option
granted October 10, 2006 and 220,449 shares at $.275 a share under an
option granted October 11, 2007. The amount of common stock and
Class B stock does not include an aggregate of 93,324 shares of common and
Class B stock, or 2.26% of the outstanding shares consisting of (i) 11,200
shares of common stock and 3,400 shares of Class B stock owned by Mr.
Modlin’s wife, the beneficial ownership of which Mr. Modlin disclaims, and
(ii) an aggregate of 11,062 shares, held as trustee for the benefit of one
child of Charles P. Johnson, the Company’s former Chairman, of which Mr.
Modlin is the sole trustee, the beneficial ownership of which Mr. Modlin
disclaims. Such shares held as trustee consist of 7,842 shares of
Class B stock convertible into a like number of shares of common stock,
2,304 shares of common stock and an additional 916 shares of common stock
if 5,000 shares of the Company’s 9% Cumulative Convertible Exchangeable
Preferred Stock are converted into common stock at $136.50 per
share. In calculating the aforesaid percentage of excluded shares,
the amount of 1,832 shares acquirable on conversion is added to the shares
of the Company outstanding at September 30, 2009. The 58.3% of
common stock deemed owned is obtained by dividing the number of common
stock shares deemed owned by the outstanding common stock increased by
adding all shares acquirable on exercise or conversion in the next 60
days. The balance of the shares under the stock options granted
January 25, 2005, November 22, 2005 and October 10, 2006 are not included
because no such shares may be acquired in the next 60 days. All such
exercise prices of warrants and options are substantially higher than the
market price for the common stock of $.03 per share on November 30,
2009.
|
(2)
|
Pursuant
to Rule 13d-3, 1,100,047 shares of common stock are deemed owned by Mr.
Segall on the exercise of a seven year warrant issued December 9, 2005,
30,000 shares pursuant to an option granted January 26, 2005 at $.55 per
share, 24,000 shares pursuant to an option granted November 22, 2005 at
$.45 a share, 18,000 shares pursuant to an option granted October 10, 2006
at $.18 a share and 12,000 shares pursuant to an option granted October
11, 2007 at $.25 a share.
|
Each
director and each executive officer listed in the Summary Compensation Table in
Item 11 of this Form 10-K has advised the Corporation that, as of November 30,
2009 he or she owned beneficially, directly or indirectly, securities of the
Corporation in the amounts set forth opposite his or her name as
follows:
Name
|
|
Shares of
Common Stock
Owned
|
|
|
Percent of Class
|
|
|
Shares of Class B
Stock Owned (1)
|
|
|
Percent of
Class
|
|
|
Percent of
All
Classes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Howard
S. Modlin
|
|
|
4,545,487
|
(2)
|
|
|
56.6
|
%
|
|
|
459,943
|
|
|
|
72.5
|
%
|
|
|
57.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John
L. Segall
|
|
|
1,209,147
|
(3)
|
|
|
25.9
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
22.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William
G. Henry
|
|
|
119,250
|
(4)
|
|
|
3.3
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
2.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
George
M. Gray
|
|
|
122,000
|
(5)
|
|
|
3.4
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
2.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aletta
Richards
|
|
|
84,000
|
(6)
|
|
|
2.4
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
2.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors
and Officers as a group (5 individuals)
|
|
|
6,079,884
|
(7)
|
|
|
64.1
|
%
|
|
|
459,943
|
|
|
|
72.5
|
%
|
|
|
64.6
|
%
|
(1)
|
The
Class B stock is convertible into common stock at any time on a
share-for-share basis.
|
(2)
|
See
Note 1 to preceding table listing all persons known to own more than 5% of
the Corporation’s common stock or Class B
stock.
|
(3)
|
See
Note 2 to preceding table listing all persons known to own more than 5% of
the Corporation’s common stock or Class B
stock.
|
(4)
|
Includes
25,000 shares owned by Mr. Henry and 94,250 shares which Mr. Henry could
acquire by the exercise of stock options within sixty (60)
days.
|
(5)
|
Includes
25,000 shares owned by Mr. Gray and 97,000 shares which Mr. Gray could
acquire by the exercise of stock options within sixty (60)
days.
|
(6)
|
Includes
84,000 shares which Ms. Richards could acquire by the exercise of stock
options within sixty (60) days.
|
(7)
|
Includes
75,100 shares of common stock owned by persons in the group, 1,902,390
shares of common stock which persons in the group have the right to
acquire by the exercise of stock options within sixty (60) days,
9,053 shares of common stock held by Mr. Modlin’s law firm, 2,084,204
shares acquirable by Mr. Modlin on exercise of a warrant at $0.575,
909,090 shares acquirable by Mr. Modlin on exercise of a warrant at $0.275
a share and 1,100,047 shares acquirable by Mr. Segall on exercise of a
warrant at $0.575 a share. Does not include 3,400 shares of Class B
Stock and 11,200 shares of common stock owned directly by members of the
directors’ and officers’ immediate families, the beneficial ownership of
which they disclaim. Also does not include 7,842 shares of Class B
stock and 2,304 shares of common stock beneficially held in trusts for
children of Charles P. Johnson, the Company’s former Chairman, of which
Mr. Modlin is the sole trustee, the beneficial ownership of which Mr.
Modlin disclaims.
|
Equity
Compensation Plan Information
Plan Category
|
|
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
|
|
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
|
|
|
Number of securities
remaining available for
future issuance under
equity compensation plans
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation
plans
approved by
security
holders
|
|
|
3,006
|
|
|
$
|
26.88
|
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation
plans
not approved
by
security holders
|
|
|
3,226,147
|
|
|
|
0.49
|
|
|
|
567,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,229,153
|
|
|
$
|
0.52
|
|
|
|
567,326
|
|
Officers
and key employees may be granted incentive stock options at an exercise price
equal to or greater than the market price on the date of grant and non-incentive
stock options at an exercise price equal to or less than the market price on the
date of grant. While individual options can be issued under various
provisions, most options, once granted, generally vest in increments of 20% per
year over a five-year period and expire within ten years. Under the
terms of these stock option plans, the Company has reserved a total of
567,326 shares of common stock at September 30, 2009.
The 2003
Stock and Bonus Plan also provides for outstanding grants of stock as described
in Note 12 to the consolidated financial statements. Officers, directors
and employees are eligible for such grants under such plan.
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED
TRANSACTIONS
|
Mr.
Howard Modlin, Secretary and a Director of the Company since 1969 and Chairman
of the Board of Directors of the Company since November 2001 and currently
Chairman, President and Chief Executive Officer, is also President of the law
firm of Weisman Celler Spett & Modlin, P.C. (“WCSM”) to whom the Company was
indebted for legal services of $2,179,000 for work performed prior to the
Company’s bankruptcy filing in November 2001 and in settlement for which the
Company issued subordinated debentures. The bankruptcy court also approved
$294,000 for work performed by WCSM while the Company operated in bankruptcy
(prior to September 15, 2003). Furthermore, the Company was indebted to
Mr. Modlin for fees for Company director meetings for which he received
subordinated debentures in the total amount of $16,400. Thereafter, WCSM
agreed to work on a specific litigation matter on a contingency basis (see Note
16). WCSM has outstanding amounts owed totaling $1,575,000 for work
performed for the Company between September 15, 2003 and September 30,
2009.
On
September 30, 2003 the Stock Option Committee of the Board of Directors awarded
Mr. Modlin 459,268 shares of the Corporation’s Class B stock and Lee M. Paschall
and John L. Segall, Directors, 25,000 shares each of the Corporation’s common
stock, all subject to registration restrictions. Refer to Note 12,
“Employee Incentive Plans” for further discussion. Messrs. Segall and
Paschall respectively received subordinated debentures in the total amount of
$19,900 and $17,900 in payment for directors fees for Company director meetings
they attended prior to November 2001. In addition, Messrs. William G.
Henry, Vice President, Finance and Administration, and George M. Gray, Vice
President, Manufacturing and Engineering, have been issued subordinated
debentures for services and bonuses prior to the Company’s bankruptcy filing in
the amounts of $125,000 and $50,000, respectively.
Notes
Payable to Related Parties
On
December 9, 2005 Mr. Howard S. Modlin, Chairman of the Board and Chief Executive
Officer, and Mr. John Segall, a Director, restructured existing loans and
entered into new senior secured loans with the Company in the principal amount
of $1,198,418 and $632,527, respectively. Interest accrues at the
rate of 10% per annum. In connection with the transactions, Mr. Modlin and
Mr. Segall each received seven year warrants expiring December 8, 2012 to
purchase common stock at $0.575 per share covering 2,084,204 shares and
1,100,047 shares, respectively.
On
February 17, 2006, the Company borrowed $250,000 from Mr. Modlin in the form of
a demand note which bore interest at the rate of 10% per annum. On April
20, 2006, the Corporation entered into an amendment of its loan arrangement with
Mr. Modlin whereby the $250,000 demand loan made by Mr. Modlin on February 17,
2006 was amended and restated into a term note, 50% of which was payable
February 17, 2007 and 50% of which was payable February 17, 2008. Mr.
Modlin received a seven year warrant expiring April 19, 2013 to purchase 909,000
shares of common stock at $0.275 per share.
In the
quarters ended March 31, 2007 and December 31, 2007, Mr. Modlin made demand
loans to the Company totaling $270,000 and $125,000, respectively, and which
bore interest at the annual rate of 10%. Such loans were paid off in the
quarter ended March 31, 2008. On April 30, May 13, July 9, September 18
and October 1, 2008 Mr. Modlin made demand loans to the Company in the amounts
of $175,000, $75,000, $110,000, $175,000 and $250,000 respectively. Such
loans bear interest at the annual rate of 10%. The loan made on July 9,
2008 was repaid on July 17, 2008. (See Note 4
for
reference to receivables and other purchases made by Mr. Modlin from the
Company).
Accrued
interest on all such loans amounted to $374,926 and $111,866 at September 30,
2009 and 2008, respectively. All loans made by Mr. Modlin and Mr. Segall
are collateralized by all the assets of the Company.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The audits for the years ended
September 30, 2009 and 2008 have not been performed and, due to the Company’s
limited financial resources to pay audit fees, no auditor has been
appointed. Therefore, there were no fees incurred to date for audit work,
audit-related work or tax work for the year ended September 30, 2009. The
only accounting fees billed for the year ended September 30, 2008 were for
quarterly review and other services performed by Eisner LLP, prior to its
resignation as the Company’s principal accounting firm, in the amount of
$40,948.
Pre-Approval
Policies and Procedures for Audit and Permitted Non-Audit Services.
The Audit
Committee has a policy of considering and, if deemed appropriate, approving, on
a case by case basis, any audit or permitted non-audit services proposed to be
performed by the Company’s independent auditor in advance of the performance of
such service. These services may include audit services, audit-related
services, tax services and other services. The Audit Committee has not
implemented a policy or procedure which delegates the authority to approve, or
pre-approve, audit or permitted non-audit services to be performed by the
Company’s independent auditor. In connection with making any pre-approval
decision, the Audit Committee must consider whether the provision of such
permitted non-audit services by the Company’s independent auditor is consistent
with maintaining such firm’s status as the Company’s independent
auditors.
PART
IV
ITEM
15. EXHIBITS
Exhibit No.
|
|
Description
|
|
|
|
3.1
|
|
Corrected
Certificate of Amended and Restated Certificate of Incorporation
of
the Corporation
1
|
|
|
|
3.2
|
|
Amended
By-Laws of the Corporation
2
|
|
|
|
4.1
|
|
Certificate
of the Powers, Designation, Preferences, Rights and Limitations of 9%
Cumulative
Convertible Exchangeable Preferred Stock
3
|
|
|
|
4.2
|
|
Indenture
dated September 15, 2003 covering issued 10% Adjustable Senior
Sub-ordinated Debentures due 2007
4
|
|
|
|
4.3
|
|
Promissory
Notes in the amounts of $343,315.07, $143,047.95,
$146,164.38, $286,095.84 and $279,794.52, issued to Howard S. Modlin
5
|
|
|
|
4.4
|
|
Promissory
Notes in the amounts of $343,315.07, $143,047.95 and $146,164.38 issued to
John L. Segall
6
|
|
|
|
4.5
|
|
Warrant
issued to Howard S. Modlin
7
|
|
|
|
4.6
|
|
Warrant
D-2 issued to Howard S. Modlin
8
|
|
|
|
4.7
|
|
Warrant
D-3 issued to John L. Segall
9
|
|
|
|
4.8
|
|
Promissory
Note in the amount of $250,000 issued to Howard S. Modlin
10
|
|
|
|
4.9
|
|
Warrant
D-4 issued to Howard S. Modlin
11
|
|
|
|
4.10
|
|
Promissory
Notes in the amounts of $125,000 and $100,000 issued to Howard
S. Modlin
12
|
|
|
|
10.1
|
|
2003
Stock and Bonus Plan, as amended
13
|
|
|
|
10.2
|
|
Form
of Stock Option to employees
14
|
|
|
|
10.3
|
|
Form
of Stock Option to Directors
15
|
|
|
|
10.4
|
|
Additional
Senior Security Agreement
16
|
|
|
|
10.5
|
|
1998
Stock Option Plan, as amended
17
|
10.6
|
|
2005
Stock Option Plan, as amended
18
|
|
|
|
10.7
|
|
Retirement
Savings and Deferred Profit Sharing Plan, and related amendments
19
|
|
|
|
10.8
|
|
Subordinated Security Agreement
dated September 15, 2003
20
|
|
|
|
10.9
|
|
Open
End Mortgage in favor of Atlas Partners Mortgage Investors, LLC as amended
21
|
|
|
|
10.10
|
|
First
Amendment to Open End Mortgage
22
|
|
|
|
10.11
|
|
Mortgage
Note in favor of Atlas Partners Mortgage Investors, LLC
23
|
|
|
|
10.12
|
|
Receivable
Sales Agreement as amended
24
|
|
|
|
10.13
|
|
Open-End
Mortgage Deed (filed herewith)
|
|
|
|
10.14
|
|
First
Modification of Open-End Mortgage Deed (filed herewith)
|
|
|
|
10.15
|
|
Eleventh
Amendment to Additional Senior Security Agreement dated October 1, 2008
(filed herewith)
|
|
|
|
10.16
|
|
$250,000
Negotiable Promissory Note dated October 1, 2008 (filed
herewith)
|
|
|
|
14.1
|
|
Code
of Conduct and Ethics
25
|
|
|
|
21
|
|
Subsidiaries
of the Registrant
|
|
|
|
31.1
|
|
Rule
13a-15(e)/15d-15(e) Certification by Chief Executive
Officer.
|
|
|
|
31.2
|
|
Rule
13a-15(e)/15d-15(e) Certification by Chief Financial
Officer.
|
|
|
|
32.1
|
|
Section
1350 Certification by Chief Executive Officer.
|
|
|
|
32.2
|
|
Section
1350 Certification by Chief Financial
Officer.
|
Exhibit
footnotes
1
|
Incorporated
by reference to Exhibit 3.1 to Form 10KSB for year ended September 30,
2005
|
2
|
Incorporated
by reference to Exhibit 3.2 to Form 8-K/A dated September 18,
2003.
|
3
|
Incorporated
by reference to Exhibit 4 to Form dated October 8,
1996.
|
4
|
Incorporated
by reference to Exhibit 4.1 to Form 8-K dated September 17,
2003.
|
5
|
Incorporated
by reference to Exhibits 10.2, 10.4, 10.6, 10.8 and 10.9 to Form 8-K dated
December 14, 2005.
|
6
|
Incorporated
by reference to Exhibits 10.3, 10.4 and 10.5 to Form 8-K dated December
14, 2005.
|
7
|
Incorporated
by reference to Exhibit 10.3 to Form 8-K dated October 4,
2004.
|
8
|
Incorporated
by reference to Exhibit 4.1 to Form 8-K dated December 14,
2005
|
9
|
Incorporated
by reference to Exhibit 4.2 to Form 8-K dated December 14,
2005
|
10
|
Incorporated
by reference to Exhibit 10.2 to Form 8-K dated April 25,
2006
|
11
|
Incorporated
by reference to Exhibit 4.1 to Form 8-K dated April 25,
2006
|
12
|
Incorporated
by reference to Exhibits 10.2 and 10.3 to Form 8-K dated March 14,
2007
|
13
|
Incorporated
by reference to Exhibit 10.1 to Form 10-K for the year ended September 30,
2007
|
14
|
Incorporated
by reference to Exhibit 4.3 to Registration Statement No.
333-131964
|
15
|
Incorporated
by reference to Exhibit 4.4 to Registration Statement No.
333-131964
|
16
|
Incorporated
by reference to Exhibit 10.1 to Form 8-K dated January 8,
2004. The Eighth Amendment thereto incorporating all prior
amendments is incorporated by reference to Exhibit 10.1 to Form 8-K dated
March 9, 2007.
|
17
|
Incorporated
by reference to Exhibit 10.6 to Form 10-K for the year ended September 30,
2007
|
18
|
Incorporated
by reference to Exhibit 10.7 to Form 10-K for the year ended September 30,
2007
|
19
|
Incorporated
by reference from Form S-8, Registration Statement No. 33-37266.
Amendments thereto are incorporated by reference to Exhibit 10.16 to Form
10-Q for the quarter ended December 31,
1996.
|
20
|
Incorporated
by reference to Exhibit 10.1 to Form 8-K/A dated September 18,
2003.
|
21
|
Incorporated
by reference to Exhibit 10.1 to Form 8-K dated August 1,
2007.
|
22
|
Incorporated
by reference to Exhibit 99.2 to Form 8-K dated December 9,
2008.
|
23
|
Incorporated
by reference to Exhibit 99.2 to Form 8-K dated December 9,
2008.
|
24
|
Incorporated
by reference to Exhibit 99.2 to Form 8-K dated October 27,
2008. Amendment dated April 15, 2009 is filed
herewith.
|
25
|
Incorporated
by reference to Exhibit 14.1 to Form 10-K for year ended September 30,
2003.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ HOWARD S. MODLIN
|
|
Chairman
of the Board and
|
|
January
13, 2010
|
HOWARD
S. MODLIN
|
|
Chief
Executive Officer
|
|
|
|
|
|
|
|
/s/ WILLIAM G. HENRY
|
|
Vice
President,
|
|
January
13, 2010
|
WILLIAM
G. HENRY
|
|
Finance
& Administration,
|
|
|
|
|
Chief
Financial Officer
|
|
|
|
|
|
|
|
/s/ JOHN L. SEGALL
|
|
Director
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January
13, 2010
|
JOHN
L. SEGALL
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Director
|
|
January
13, 2010
|
ALETTA
RICHARDS
|
|
|
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